One time there was an attempted coup d’etat while I was in Kenya; barbed wire barricades were placed on city streets and Nairobi had a curfew every evening from 6pm until 6am the next morning. The city was at a standstill; everyone including tourists, merchants, residents, essentially all of its population, was immobilized for several days.
The way we live now in our modern society, there is a deep dependency on our governments, the various grids and infrastructure systems such as power, water, roads, rails, waterways, air traffic, telecom, internet, and ATMs.
Recently, circa February and March 2011, we have seen entire populations without access to the basic resources in Egypt (for a while, the government in Egypt shut down the Internet) and Japan.
How does one create an environment of sustainability so they are capable of withstanding any natural or man-made shocks to the system?
What would you do, if … one morning you awakened and all the money in your bank account was frozen?
It happened within a major power and this lead to an extreme situation where the citizens of the major power become even more dependent on the government to meet their needs. The political power that arose to meet the needs of the people that were not prepared was the national socialist power and led to the rise of Hitler, the Nazis, and the resulting carnage and devastation of World War II.
I am not a conspiracy theory type of person but I do believe that if we do not study history, we are doomed to repeat the mistakes of the past.
So let’s take a quick look at a situation, a mere 80 years ago.
In the late 1920s, the economy of the Weimar Republic was beset by numerous fiscal troubles. The global depression spread quickly to Germany, undermining the government's ability to make its reparation payments from the World War I.
Fearing a return to hyperinflation, many Germans who had spent the last decade building up a small fortune during the Weimar Republic's own 'Roaring 20s' decided to pack up and leave; they remembered the days when banknotes were used as wallpaper and had no desire to repeat the experience.
In 1931, Chancellor Heinrich Bruning imposed a 'flight tax', which levied a 25% tax on the value of all property and capital for Germans leaving the country.
Total revenue collected from this tax in the earliest days amounted to approximately 1 million Reichsmarks (RM), the equivalent of $56 million today. By the late 1930s under Hitler's rule, flight tax revenue soared to RM 342 million (approx $21.5 billion today) as more people headed toward the exits.
This flight tax constitutes one of the earliest modern examples of capital controls. They've evolved substantially since the days of Hitler but the end goal is the same … governments controlling the flow of capital across borders.
Governments impose these for a variety of reasons-- rapidly developing nations may want to restrict the flow of capital into their country, preventing 'hot money' from pumping up prices and affecting local markets. We see this underway today in places like Brazil and Thailand.
In other instances, bankrupt governments seek to trap capital within their borders, maximizing the amount available for subsequent taxation or other forms of confiscation. This tactic is usually employed when lost confidence has impaired the government's capability to borrow.
We're seeing strong indications of both examples today, though the latter example is the most alarming.
The British government, for example, just announced an increase to its bank levy that taxes UK-domiciled banks on their worldwide balance sheets. In response, the mega-center bank HSBC has indicated that it may move its headquarters elsewhere.
Most likely, the British government will enact legislation to discourage or prevent this from happening, likely with a modern day corporate flight tax (albeit with a more patriotic sounding name).
Capital controls can take a variety of other forms-- including taxation on outward remittances, restrictions on the movement of financial instruments, bureaucratic approval processes for foreign transactions, reporting requirements for foreign assets, and government control over banks.
This last is important-- when politicians and bankers are in bed with each other, banks can be compelled to loan a portion of their deposits to the treasury at unrealistic terms, sticking bank customers with sub-optimal yields below the rate of inflation.
In the US, retirement accounts and pensions will be the first to go. They're the easiest to grab because most people hold their retirement accounts domestically with a large financial institution that will happily sell every customer down the river when the government comes calling.
The way they'll do this is simple … the next time there's a market meltdown (bear in mind that insiders are selling like crazy right now), the government will step in with new legislation that requires these institutions to invest a portion of their accounts in the 'safety' of government securities.
We are seeing strong statements being made by US politicians along these lines for the government to manage retirement accounts here in the USA. We have also recently seen numerous examples of other bankrupt nations from Argentina to Hungary moving to seize their citizens' pensions.
The next step would be against retail bank accounts, specifically setting up provisions that discourage moving money overseas ... and eventually restrict it all together.
This would happen through new approval processes at the banking level, additional reporting requirements for foreign accounts, and disincentives for foreign banks to accept US customers.
Curiously, all of these have started to happen.
For example, while there are still a multitude of banks around the world who happily accept US customers, Americans are unwelcome at most foreign financial institutions thanks to continuous threats and pressure from the IRS. As one banker in Hong Kong said recently, 'they (meaning the IRS) are very scaaaaary'...
This certainly jives with the timeline of the US government's ticking debt bomb; at a minimum, the market will require higher yields, and politicians will need cheap sources of capital to continue financing their waste.
It is imperative that everyone establish a foreign bank account, even with a small deposit. There are several banks located off-shore where you can open an account through the mail with just a nominal deposit.
This way, if you ever need to move the bulk of your funds in a hurry, you'll at least have the established infrastructure to do it.
Government playbooks are limited … when confidence falters, new taxes fail to produce substantial revenue, and inflation causes a loss of popular support, capital controls are the answer. Problem is, we live in a world where legislation passed late at night can take immediate effect while we all sleep.
I know it's easy to kick the can down the road, but as the political and economic support for capital controls is spreading around the globe, I would urge you to take action immediately.
In the meantime, what to do? Obtain more financial education and learn how to protect yourself during these trying times and purchase precious metals including gold to hedge or protect your net worth against the decreasing value of the US Dollar, which is just paper money.
I favor a quote from Steve Forbes … Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to being savvy with our money and using alternative wealth creating strategies; this will be they key to resolving our financial crisis.
To gain the necessary financial education, it is best to pursue association with, access to, and membership in, a wealth creation community. As a result, you will learn about alternative wealth creating strategies and consider investments in non-dollar denominated assets … perhaps emerging markets … perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, rare earths, water rights, oil, natural gas, potash mines, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
For those wanting protection of their purchasing power in gold, there are several ways that may be appropriate to obtain this protection. These include direct ownership in minted coins, use of gold exchange traded funds, gold mutual funds, and junior gold stocks. Many are investigating having part of their IRAs in gold, silver, precious metals, and non-dollar denominated currencies.
In addition, for those that truly believe sovereign risk is the greatest risk we all face, it is wise to learn how to implement a multiple flag strategy to diversify this risk or provide protection against higher taxes, capital controls, hyperinflation, civil unrest, erosion of personal liberty, and the rise of a police state. With a multiple flag system, you consider taking preparations like, but not limited to, establishing a foreign bank account, purchasing some real estate overseas, seeking alternate sources of income, dual citizenship, and carrying multiple passports.
I will continue to provide examples of things we need to learn, the secrets of the insiders, as part of being savvy with our money, and introduce alternative wealth creating strategies, in future articles and updates at my blog over the next few weeks.
In addition, a good book to read would be “Bad Money” by Kevin Phillips; it describes Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.
Finally, I want to thank Simon Black of Sovereign Man as he was the source of some of the materials mentioned in this post.
In closing, be sure to Meet Me at my website, WhoIsMikeFarrell; Read Posts about my Internet Marketing Business at aspenIbiz blogspot; and Obtain Some Tips About Being No 1 on Google at aspenIbiz My Go-To-Market Partners website; and Learn How to Live Longer at aspenIbiz My Life’s Advantage Today site.
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