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On Capital Controls

Tyler Durden's picture




 

Submitted by Simon Black of Sovereign Man

It starts: the government’s plan to steal your money

There are consequences to being flat broke.

There are consequences to investing any level of confidence in a financial system underpinned by debt and the creation of paper currency.

There are consequences for ignoring reality and pretending that everything is normal.

This is one of them: European officials yesterday flat out admitted that they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe’s borderless Schengen area.

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawls, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being releived of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.

European political leaders aim to put a tourniquet on this wound in the worst possible way.

So what are capital controls?

Simply, capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

- Setting a fixed amount for bank withdrawals, or suspending them altogether
- Forcing citizens or banks to hold government debt
- Curtailing or suspending international bank transfers
- Curtailing or suspending foreign exchange transactions
- Criminalizing the purchase and ownership of precious metals
- Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders.

This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

The thing about capital controls is that they’re like airine baggage fees; ultimately, all governments want to do it, they’re just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame ‘industry standards’.

Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It’s been a long time coming for governments to return to that model.

Since the inception of this letter, it has been a constant theme for us to talk about the increasing threat of capital controls. Your money, your savings, your livelihood are all under attack by insolvent governments, and it’s critical to take steps to reduce your exposure.

When European financial leaders all openly admit that they’re making plans to establish continent-wide capital controls, it really begs the question– what additional warning sign does one need?

The dominos have already started falling. Iceland. Ireland. Greece. Spain. Portugal. Italy. Cyprus. Soon even France and the rest of Europe. And it will come to the United States as well. There are over 15 trillion reasons why.

So what are the most critical steps to take now?

1) Buy precious metals and store in a secure jurisdiction.

Holding gold and silver overseas is a great way to (a) ensure your savings is protected against inflation, and (b) ensure that your precious metals cannot be confiscated in the event that gold ownership is criminalized in your home country.

I strongly recommend Singapore, Hong Kong, and Abu Dhabi as three potential safe jurisdictions for your gold and silver.

2) Open a foreign bank account.

For funds that need to be maintained within the financial system (as opposed to precious metals), make sure you have a safe home for your money abroad in a safe, well-capitalized bank.

3) Have a place to go overseas

Economic turmoil brought on by governments stealing people’s savings generally goes not bode well for social stability. If things get hairy, you’ll want to have a place to wait it out. And you don’t want to be deciding on the location while you’re packing your bags.

As an example, I’ve picked up an 1100-acre farm in central Chile that won’t skip a beat when the financial system implodes. The sovereign debt bubble does not affect whether or not my trees will bear fruit or my vegetables will grow.

 

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Tue, 06/12/2012 - 14:13 | 2518770 W10321303
W10321303's picture

The "Invisible-Guiding-Hand-of-the-Free-Market Zombie Academics have produced their own worst 'nightmare'.

Socialist Accounting and Accounting for Socialism

The following argument derives from Joan Robinson and John Eatwell’s excellent (though now hard to find) book ‘Introduction to Modern Economics’. It begins with the all too familiar formula for GDP stated in net terms in order to track changes in income. The formula runs as such

Calls for balanced budgets in the present environment have long appeared somewhat confused, of that we have had little doubt for some time now as balanced budgets seem to exacerbate the problems they target rather than solve them and may lead to higher debt-to-GDP levels due to the reduction in real economic growth that they lead to.

However, the left has generally agreed that the much of the motivation behind the balanced budget rhetoric was and is ideological. And with conservatives at organisations like the Peterson Institute and the Cato Institute, together with their counterparts at the Adam Smith Institute in Britain, daily attacking the deficit over the airwaves there seems to be much evidence of this assertion. Indeed, Paul Krugman recently caught some Tories with their ideological pants around their ankles in a discussion over at the BBC (watch from about 3.00 on).

This is all well and good. It would certainly seem that conservatives think that by battling the budget deficit they are eroding the foundations on which the Big Government monster sits, but is this really the case? What if I told you that all the balanced budget rhetoric was actually having the objective effect of placing us on the road to socialism?

 

What we’ve done here is essentially broken down the ‘Consumption’ element of the original formula to highlight what effect a rise in taxes or saving will have on national income. Such a breakdown can tell us a number of important things. Here I will let Robinson and Eatwell make the point themselves:

With investment constant, an increase in government expenditure increases income, and increases both total saving and the yield of taxes. The addition to the National Debt caused by a round of government expenditure is less than the expenditure, because of the extra tax revenue that it generates. This was an important part of the case for public investment to combat unemployment in the slump [i.e. the Great Depression].

 

 

Now, that’s all well and good. This seems an obvious point today given the situation in many European countries where austerity has been implemented and yet the national debt continues to climb ever higher. But then Robinson and Eatwell go on to make a far more interesting point, one that I would argue cuts right to the bone of the ideological pretentions of conservatives budget hawks the world over.

Now, suppose that tax rates have been increased; t is higher. Then, if everything else, including I and G, are the same, Y must be lower. This comes about because higher taxes restrain consumption. In so far as a higher t means a lower s – the payment of higher taxes reduces saving – the reduction in Y is that much less.

This argument leads to a striking conclusion. Imagine a government that adopted a policy of ensuring enough outlay to maintain near full-employment while keeping its annual budget balanced. In a given situation, this government would have to make more expenditure than if it maintained the same level of employment with a deficit, for there has to be enough expenditure to make up for the restraint on consumption by higher taxes. The government therefore has to think of more things to spend money on. Unless it all goes on armaments and the moon, this must mean a greater involvement of the public sector in social policy.

Thus the idea that a government should engage in pro-growth policies while attempting to balance the budget through higher taxes is, as Robinson and Eatwell put it: “far more radical than the so-called Keynesian principle of allowing a deficit when effective demand needs a boost”. In a very real sense balancing the budget while targeting growth is a sure road to socialism, as it ensures that the government take over more of the role the private sector currently occupies in the economy. Again, if we accept the rather loose terms of the argument as laid out above, this is not really open to debate; it is a conclusion not reached by high theorising but instead by examining simple accounting.

Budget Hawk Socialism

But of course the reader will rightly point out that this is not the stance of your average Peterson Institute clone or Tory hack. To further their ideological project they want to decrease government spending rather than increasing taxation. This is true, of course, but in practice it simply does not work.

Wed, 06/13/2012 - 00:28 | 2520437 Bringin It
Bringin It's picture

Consider a synopsis and a link.

Tue, 06/12/2012 - 14:16 | 2518789 Cupid Stunt
Cupid Stunt's picture

Singapore.Hong Kong.Abu Dhabi,a safe jurisdiction for Ag, Au.

Looks like I'll be getting a new paddle boat for me and Mrs Stunt.

Tue, 06/12/2012 - 14:18 | 2518798 Torsten
Torsten's picture

    Are you ready for the coming collapse of the U.S. dollar? Followed by the collapse of the U.S. economy? Followed by hordes of starving people roaming the streets searching for something to eat, something to steal? A high percentage of economists who are not part of the mainline ‘news’ propaganda network predict it’s not far off. They say that when the expenses of a nation perpetually exceed its gross national product, the system collapses. The U.S. debt is enormous, it is overwhelming and it’s increasing out-of-control.

    This brings us (along with many others) to the point of recommending that you have a retreat when the cities become crime ridden and begin to fall. Think New Orleans, hurricane Katrina, but nation-wide.

    The problem with most stationary retreats is that they are easily vandalized when no one is there. The solution?--a mobile retreat that you can take anywhere. Bonus: you don’t have to pay real-estate taxes (unless it’s your property).

    Thus, please find for sale, a camper of unmatched quality--designed for comfort--a hide-away when survival is at stake. You can live quite comfortably in this unit:  HinterlandCampers (dot) com

Tue, 06/12/2012 - 14:58 | 2518997 ken
ken's picture

What about gas? Will it be available? I guess one would have to 'plan' for shortages?

 

Wed, 06/13/2012 - 00:31 | 2520442 Bringin It
Bringin It's picture

Eventually, you just stop rolling.

Tue, 06/12/2012 - 14:37 | 2518888 NoField5
NoField5's picture

Add to that list "transaction taxes."

Tue, 06/12/2012 - 14:55 | 2518978 dognamedabu
dognamedabu's picture

A dingo's got my baby!

Tue, 06/12/2012 - 15:57 | 2519226 zippy_uk
zippy_uk's picture

Your cash is our cash,

Our debt is your debt

Tue, 06/12/2012 - 19:36 | 2519949 mccoyspace
mccoyspace's picture

I lived in Abu Dhabi for a year -- not my first choice, and certainly not for a bug out location.
Visitors get a 30 day visa, renewable once. To get a residency visa you have to have a local job/employer to sponsor you. To open a bank account you need to have a residency visa. If you want to start a business you have to have a local partner who has 51% ownership. Although English is the language of daily transactions, all official contracts and business law is in Arabic and follows Sharia law--the official law of the land.

It is not a place you want to be in debt. You can be in jail for a long time if your debts go bad.

Everything there is imported so they immediately feel the impacts of commodities inflation (food, energy, etc). Any supply disruptions would cause instant problems.

Wed, 06/13/2012 - 00:36 | 2520449 Bringin It
Bringin It's picture

Thanks, sitting far off where I am, figured as much.  Throw in the fact that it's located in ground-zero for big power hydro-carbon competition and you have a real anxiety inducing mess.  I bet the food is good though.

Mon, 08/06/2012 - 02:46 | 2681004 yang46
yang46's picture

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