capital controls?

[jk]

i raised this question in a thread on housing, but decided to open a thread of its own: what is the risk of capital controls being imposed, preventing you from moving assets overseas? it seems hard to imagine, but could a dollar crisis lead to that? do people think it important to move some assets out of the country NOW, before it's illegal?

[JD_]

Re: capital controls?

In regards to capital controls I'm wondering what is the difference between moving liquid assets out of the country and buying foreign assets? If I wanted to I could open a savings account with the Isle of Man Bank for £1 and then use EFT (Electronic Funds Transfers) from my domestic bank to offshore some of my assets. That would be an asset transfer to a supposed tax haven, the Isle of Man. I say supposed tax haven because if the UK decides it wants to change the rules of the game with it's crown dependency I bet the Royal Marines can and will land! Now, what if I decide to buy a house on the Isle of Man? Is that going to become illegal as well? While one asset on the Isle of Man is liquid and the other is illiquid they seem essentially the same thing to me minus some work/time and transactions costs.

Is the government going to make it illegal to own foreign assets as well? If not, then there is a loophole in their capital controls. If they are then corporate america is totally screwed along with the world economy. I don't see why the government wouldn't just hyperinflate instead of trying to control capital. Once you're off an asset backed currency isn't it a lot easier to just print money instead of trying to control where everyone's capital is?

Capital controls aren't without precedent. FDR prohibited holdings of gold and silver in 1933 by Executive Order after Congress declared a "serious emergency exists" in the nation. I was reading some papers from Nassim Nicholas Taleb, author of Fooled by Randomness, yesterday where he pointed out that the rules of the game can be changed at will and so it's the totally unexpected event that "blowups" most people financially. People play by a set of rules that they believe are permanent only to find them changed by the stroke of a pen...or the barrel of a gun. Can and will governments of the world change the rules of the game when they believe they need to? I'm thinking they will so I've come to the conclusion there might in fact not be any safe havens. It's almost as if the only safe haven is that you're relatively better off than your neighbors. The new safe haven...keeping ahead of the Joneses!

[jk]

Re: capital controls?

you can buy that house on the isle of man NOW, but if capital controls were imposed you couldn't export the money to buy it in the future.

it would be ironic to have the yuan and ruble become fully convertible at the same time the dollar ceased to be.

[JD_]

Re: capital controls?

Hi jk,

Yes, I could buy the house now. I can also repatriate my offshore assets now and can leave the country now. All I'm saying is that if we're prepared to allow for the rules of the game to change (imposition of capital controls) we shouldn't assume that the rules we need to take advantage of the game (ability to repatriate offshore capital or ability to leave the country) will still be there as well. It all depends on why they are imposing the capital controls in the first place.

I don't have anything against offshoring. I've thought about it myself. Works in some situations, doesn't seem to matter in others. I don't think there is much downside to it except time and transaction costs. It certainly diversifies and that is a good thing.

JD

[jk]

Re: capital controls?

jd, i know any of the rules might change. i'm looking for black swans here, or at least trying to imagine them, and trying to asess the probabilities of the unknowable. taleb talks of fat tails consisting of unlikely events which are nonetheless more likely than the market thinks. i think capital controls lie somewhere in that fat tail, and i'm trying to get my mind around the question of just how far out in that tail it may lie.

countries that have had capital controls have always allowed the import or repatriation of capital, though they have at times restricted foreign direct investment. they've usually allowed travel but imposed restrictions on how much currency can be carried out or spent abroad. the fact that any rule might change doesn't imply that all rule changes are equally likely.

most of the discussions on this board take stagflation as the most likely scenario going forward. if the dollar weakens markedly, as i believe will happen, more and more individuals, especially people with wealth, as well as institutions, will want to move money into other currencies and into precious metals, commodities and other real assets.

the question i'm raising is how far-fetched it might be in such a scenario for the government to pass "the strong american dollar act" restricting some of these actions. what are the institutional, legal, political or economic considerations that would militate against such an action?

[EJ]

Re: capital controls?

The important principle to keep in mind in this discussion, which is a very constructive one, is that the US government can and will do whatever is necessary to protect what it believes to be in the nation's best interest in a time of crisis.

The job of the Fed and the Treasury in a crisis is to protect US financial security interests and the viability of the government first, its banking system second, its industries third, its citizens forth, and its trade partners last. You can, as a citizen, at least be thankful that the government will put your interests ahead of, say, China's. But make no mistake, your personal access to capital in a foreign account will be the least of the US government's concerns. If the government decides that hoarding money in US accounts is best for the US, you can expect that it will take measures to do that, that the nations whose money is being hoarded here will counter by restricting US citizens' access to capital there. So one criteria for picking a foreign nation to open an account is one that is most likely to remain a strong ally and "off the list" should the US need to slap on currency controls. Canada is nice this time of year.

What the US government will demand, whether "fair" or not, is your patriotic assistance in restoring stability to the system. If that means, for example, converting your and everyone else's 1 year t-bills into ten year notes with the stroke of a pen in order to lower short term debt obligations, then they will do so. What they are least likely to mess with is short term debt, say, 13 week t-bills. That's where these days I keep all my "cash" via a Treasury Direct account (up to $3M, no fees).

However, as the US is now running massive trade deficits and has become a major net debtor, a decision to implement currency controls today is not the same decision as it was during previous crises when the US was a net creditor and ran a trade surplus. In fact, Ka-Poom theory has at its root the simple idea that if the US were to find itself once again in the kind of crises that it has found itself in several times in the past, crises that forced it to either default on debt, inflate its way out of debt, impose currency controls, or enact some other form of free market control mechanism, that the US is today not exactly in the cat bird seat with respect to the negative consequences of these measures on the nation's currency, interest rates and inflation.

So, with respect to the occurance of the fat tail event that has been mentioned here, if one believes it likely, may be effectively hedged via a combination of 13 week t-bills, notes held in the accounts of strong political foreign allies, and PMs. It is very hard to imagine any scenario wherein one cannot easily find a buyer for any or all of the above.

[JD_]

Re: capital controls?

jd, i know any of the rules might change. i'm looking for black swans here, or at least trying to imagine them, and trying to asess the probabilities of the unknowable. taleb talks of fat tails consisting of unlikely events which are nonetheless more likely than the market thinks. i think capital controls lie somewhere in that fat tail, and i'm trying to get my mind around the question of just how far out in that tail it may lie.

jk,

I really like Taleb's theories. His repudiation of financial theories and ideas based on the Gaussian distribution. Theories such as MPT (Modern Portfolio Theory) and ideas such as RTM (Reversion To the Mean). I loved the fact that he felt financial markets followed a power law distribution instead of a Gaussian. How if that is the case that the markets are discounting unlikely events too highly and so that is an inefficiency that might be able to be exploited.

I really liked his notion of flipping the typical investor modus operandi on it's head. Instead of working diligently for many years to accumulate small gains while hoping for no catastrophic losses he believes one should work diligently for many years to minimize small losses while hoping for rare but extreme gains. I never really thought about that. I suppose it doesn't really matter which mode to operate in given a long time horizon if risks are priced efficiently but if financial markets are using Gaussian distributions to determine probabilities of risky events and financial markets are in fact a power law distribution (fat tails) then the unlikely risky events are being priced wrong. Even moreso is that the "Black Swans" or unknown risks aren't even being priced but you can purchase them by buying the risk products that include the fat tails.

One downside to his idea is that the sellers of the fat tail risk products may in fact just go belly up on you when it's time to collect. They've so underpriced the product that they cannot pay. Victor Niederhoffer went bankrupt on Black Monday in 1987 because of the 22% market decline. He sold options against the event. I don't know if the owners of those options were paid in full. LTCM (Long Term Capital Management) nearly went bankrupt in 1998 due to the Russian debt default. Since the Fed engineered an intervention I assume the owners of the options LTCM had sold were paid in full. It doesn't do you much good if the entity that sold you the risk product can't in fact pay!

I don't know how valid Taleb's theories are but they are sure making me think about what I had been doing. It was funny to see him repudiate MPT, CAPM (Capital Asset Pricing Model), and RTM all by just saying perhaps the financial theorists had chosen the wrong distribution. Gaussian distribution makes the math simple for the theories but maybe financial markets follow a power law distribution. Funny because I've recently given up on MPT, CAPM, and RTM because I felt like they were turning me into an equity bubble bag holder. I don't know who is going to have the last laugh but I got tired of taking the equity risk to make a 7% return. I can currently make a 5% return in a money market.

JD

[jk]

Re: capital controls?

jd

i certainly don't believe in mpt or capm, i think efficient market theory is a hoax, but i still have a fondness for rtm.

jk

[Pilot Fish]

Re: capital controls?

Couple of related questions . . .

1. Under our current system, who would actually have the authority to impose capital controls? Would any such act have to involve Congress?

2. I suppose this depends on the answer to the previous question but how much in the way of "lead time", if any, might the general public have in such a scenario? It would seem that any credible evidence such a thing was even being considered might lead to a "rush for the exits" just to be on the safe side. Yet, unless this really can be done overnight by the "stroke of the pen" on the authority of one or a very few government officials, it would seem rather difficult to keep it a secret.

[Charles Mackay]

Re: capital controls?

It's not easy. Try and locate a satisfactory overseas institution. I tried Canada, Hong Kong, and the UK and no one will buy securities for US citizens because of US SEC regulations. The SEC strong arms these countries by blocking them from participating in US markets if they don't "play ball". Playing ball means that country can't allow US citizens to buy and hold foregin securities from that country's brokers and banks. You can get on the phone right now and call TD Trust in Canada and they will tell you nope they can't buy Canadian securities for US citizens.

If you do it in Austria or Switzerland expect to pay fees that are so exhorbitant that you won't make any money.

My criteria is:
1) multiple currency support
2) low fees
3) online banking
4) gold storage
5) willing to buy stocks and securities even though I'm a US citizen.
6) no foreign taxes
7) bank secrecy
8) English speaking

Jyske Bank in Denmark was suggested to me but I found out that only the Swiss branch of Jyske can store gold and then you don't get Netbank so you can't do online transactions.

I can buy CEF or Mega Uranium or any other Canadian securities thru Interactive Brokers but that doesn't protect me from US controls. It's easy to open a bank account in Canada and hold C$ but I'd rather hold gold mining stocks, uranium, and energy and commodities in Canada and I can't do it.

Help :confused:

[bart]

Re: capital controls?

...
I can buy CEF or Mega Uranium or any other Canadian securities thru Interactive Brokers but that doesn't protect me from US controls. It's easy to open a bank account in Canada and hold C$ but I'd rather hold gold mining stocks, uranium, and energy and commodities in Canada and I can't do it.

Help :confused:

For what its worth, you can denominate your IB account in a foreign currency or open another one or more in different currencies.

There are also options like Perth Mint certs but I'm sure you're aware of those and they have their downsides too.
I haven't found a decent solution myself either, assuming staying legal (and I won't go with something illegal or even "gray").

[Charles Mackay]

Re: capital controls?

For what its worth, you can denominate your IB account in a foreign currency or open another one or more in different currencies.

There are also options like Perth Mint certs but I'm sure you're aware of those and they have their downsides too.
I haven't found a decent solution myself either, assuming staying legal (and I won't go with something illegal or even "gray").

Hi Bart, yes I think PMCs are a nice solution but like you said its still not a bird in the hand. You can also store some maple leafs in your Canadian safe deposit box for non US diversification but you aren't insured. Still, it may be a nice escape valve. And yes, my IB account is denominated in Euros which is held at CitiBank in Germany but it's still under US jursidiction and it's CITIBANK no less. (one of the main derivative underwriting banks).

I still have no solution for satisfying my list of criteria in a foreign institution that I listed above.

I think it's important to realize that just making profits in US$ in not enough to survive Ka Poom. You can't allow the US to depreciate the $ by 99999% and then take half or more of that depreciation in taxes. To accomplish that it requires holding your wealth in something that doesn't show such a huge phony fiat profit... such as holding CCO on the TSE rather than CEF on a US exchange.

[jk]

Re: capital controls?

re non-u.s. accounts. i'm sure you recall that on your 1040 every year you are asked if you hold any accounts overseas. one thing i came across in the past [but i'm not sure who might still offer this] was a paid up insurance policy in e.g. swiss francs. broader opportunities might exist if there were a variable annuity available domiciled abroad. such a product would not be an "account" [i guess] and would provide whatever flexibility offered by the sponsor. anyone aware of such a thing? if not, anyone connected to an institution that would want to start one?

[Charles Mackay]

Re: capital controls?

re non-u.s. accounts. i'm sure you recall that on your 1040 every year you are asked if you hold any accounts overseas. one thing i came across in the past [but i'm not sure who might still offer this] was a paid up insurance policy in e.g. swiss francs. broader opportunities might exist if there were a variable annuity available domiciled abroad. such a product would not be an "account" [i guess] and would provide whatever flexibility offered by the sponsor. anyone aware of such a thing? if not, anyone connected to an institution that would want to start one?

Yes JK, Swiss Annuities are still very popular and offered by most of the Swiss Institutions.

[jk]

Re: capital controls?

charles, friends of yours have used the services from http://www.safewealth.com

do you happen to know how long your friends have dealt with them, and what kind of due diligence was done?