It’s crucially important to your financial future that you understand what capital controls are, how and why they are implemented, the harm they can cause, and what you can do to protect yourself. [This article does just that. Read on!]
So says Nick Giambruno (internationalman.com) in edited excerpts from his original articles entitled Penning the Sheep for a Shearing—Capital Controls, Part 1* and Part 2**.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Giambruno goes on to say in further edited excerpts:
I believe it is a near certainty that the U.S. dollar will lose its role as the world’s premier reserve currency and when that happens, capital controls are sure to follow.
It’s not exactly a secret that the West generally, and the U.S. in particular, are moving deeper into bankruptcy and are seeking more and more control over all facets of their citizens’ lives. These trends will sooner or later lead to an overt attempt to control the flow of money in some way—just as they have in other countries throughout history that have headed down similar paths.
The purpose of capital controls is straightforward: to restrict and control the free flow of money into and out of a country. Capital controls come in all sorts of shapes, sizes, and labels but no matter what they’re labeled or how they’re implemented, the end result is always the same—restricting, controlling, and taxing the flow of money and the effects are always harmful…
Why Do Governments Impose Capital Controls?
It’s simple: imposing capital controls is similar to penning sheep that are about to be sheared so that they cannot escape.
Capital controls are not usually used unless a government has run out of ways to otherwise steal money from its people, such as when it can no longer borrow, inflate the currency, or tax like it used to.
In most cases, capital controls are used during acute crises, like financial and banking collapses, wars, or in countries with chronic economic problems. In other cases, it’s just the dominating nature of the particular government to control its citizens by denying them the means of taking their wealth abroad.
No matter the immediate reason, an always attractive effect of capital controls for governments is that they trap as much money within their borders and their reach as possible. They of course do this to optimize the amount of money that’s available for them to tax or otherwise confiscate.
Capital controls are also used because they can be politically popular. The government will try to get the average person to incorrectly believe that moving your money offshore or investing in foreign assets is something that is only for the rich or is otherwise unpatriotic (both are obviously false). It’s also a way for the government to show that it is “doing something” during a crisis.
How Are Capital Controls Usually Implemented?
In order to be effective, capital controls naturally have to come as a surprise – to the average person at least. The political and economic elite are usually tipped off well in advance and take action accordingly.
Announcing them to the public beforehand would cause people to get their money out before the controls are put in place, which would defeat the purpose of implementing them in the first place.
From the perspective of the government, weekends and holidays are ideal times to implement capital controls. Here are the four most common ways they’re imposed:
1. “Official” Currency Exchange Rates
The first way capital controls are imposed is when a government sets an “official” currency exchange rate. Since gold’s value is universally recognized across the globe and is the international money par excellence, “official” prices for gold also fall under this category.
The “official” rate is always unfavorable compared to the black market rate (i.e., the free market rate). This is exactly what’s happening in Argentina and Venezuela. Unless you go through some convoluted process, whenever you wire or otherwise bring large amounts of money into and out of the country, you’ll likely get stuck with the unfavorable “official” exchange rate set by the government. Getting the more-favorable black market rate usually involves informal transactions on the street, which is of course technically illegal since you’re supposed to use the government-approved “official” rate. The penalties and enforcement of this vary widely among countries with this type of capital control.
In reality, the difference between the market rate and the “official” rate amounts to a wealth transfer from you to the government. It’s a form of implicit taxation.
2. Explicit Taxation
Another form of capital controls is when a government imposes explicit taxes that specifically target foreign investments, foreign currencies, or gold in order to discourage you from buying them. An example of this is India, which imposed a 10% tax on gold imports in 2012.
Governments prefer you stored your wealth in the local currency, where it’s easier for them to tax, outright confiscate, or siphon via inflation.
Taxation on inbound/outbound money transfers is also another tactic. While you would still be able to send money abroad to an offshore bank (or receive it from abroad), there would be a tax, of say 20%—or whatever the government wants.
No matter the type of taxation-based capital control, you will still able to move your capital although it will likely be very costly to do so.
3. Restrictions and Regulations
Capital controls can also come in the form of restrictions on the amount of foreign currency or gold that can imported, exported, or otherwise possessed. This may come in the form of a regulation that prohibits you from taking a certain amount of money out of the country (usually only a couple of thousand dollars) without special permission from the government.
4. Outright Prohibition
This is the most severe form of the capital controls. This is where a government outright prohibits the ownership of foreign currencies, offshore bank accounts, foreign assets, gold, or moving any form of wealth abroad.
How to Prepare
With no conceivable material slowdown (let alone reversal) in the growth of U.S. government spending, debt, and currency creation, I believe it’s just a matter of time until a tipping point will be reached (probably the breakdown of the petrodollar system and the loss of the dollar’s role as the world’s premier reserve currency) and capital controls will be presented as the solution and it could all happen in an instant. All it would take would be the stroke of Obama’s pen with a new executive order.
Below are 3 ways to preempt capital controls to effectively protect yourself:
1. internationalize your savings. Moving your money offshore ensures that you won’t get penned for the shearing that always follows capital controls. You will have protected yourself from the “stability levy,” currency devaluation, or whatever form of wealth confiscation the government chooses to implement…
Timing is the essential ingredient. I cannot emphasize enough how important it is to be prepared. A year or two early is always better than one day too late. You will never know precisely when the day of reckoning will come until it’s too late as it will likely come as a surprise in order to ensure its effectiveness…
Nobody knows what the trigger will be for the U.S. or when it will come. We could wake up one morning to find out that the Russians and Chinese have decided to dump their Treasuries, causing a run on the dollar, and the reaction of the U.S. government is to impose capital controls. There are many possibilities.
Even if capital controls are never imposed, you are no worse off for internationalizing your savings. In all likelihood, you’d be better off. You could sleep better at night knowing that you have insured your savings by diversifying your political risk. Also, many offshore banks are better capitalized and otherwise sounder than any bank you would find in your home country—at least if you live in the U.S. or the EU.
2. buy foreign real estate and
3. store your physical gold abroad.
The above are the kinds of topics and actionable strategies that we cover in great detail in our Going Global publication…[which] I recommend you check out while the window of opportunity is still open.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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