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SOVEREIGN MAN

The march towards capital controls is quickening

February 8, 2011
Santiago, Chile

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 Great War.

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 amounted to roughly 1 million Reichsmarks (RM) in its earliest days ($56 million today). By the late 1930s under Hitler’s rule, flight tax revenue soared to RM 342 million ($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 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 is  the most alarming.  As I scan the headlines and hear from colleagues in the US and Europe, it’s clear to me that the march towards stricter capital controls is quickening its pace.

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, HSBC has indicated that it may move its headquarters elsewhere.

I suspect 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, I think retirement accounts 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.

Insider politiconomists like Teresa Ghilarducci have already strongly advocated for government managed retirement accounts in the US, and we’ve 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 altogether.

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 told me recently, ‘they are very scaaaaary’…

Also, the new HIRE Act legislation imposes additional reporting requirements and restrictions for foreign accounts that gradually phase in over the next two years.

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.

I’ve said before– it’s imperative that everyone establish a foreign bank account, even with a small deposit. There are several banks like Caye Bank in Belize 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.

For US taxpayers, I think the more immediate threat is to your retirement account. If you have an IRA, you can set up an Open Opportunity structure, take back control over your own savings, and be free to move your funds overseas.

(I think this is a no-brainer; you can read more about how to protect yourself with an Open Opportunity structure from my friend Terry Coxon’s book Unleash your IRA, which he’s now offering at a steep discount for Sovereign Man readers.)

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.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • sharonhaight

    We are in a position where we’d like to survive with no bank account at all, but it is impossible with the need to pay certain bills that are out of state like health care premiums etc. I use PayPal as much as possible, but in the end, that requires a link to an bank as well. What to do?

    • Diogenes

      Check out the reloadable prepaid debit card at dollar general or the greendot card. Both allow you to send checks from your card. Walmart has a good card too, that also allows you to cash checks at Walmart.

    • Diogenes

      Oh yea, almost forgot this:
      http://paypalsucks.com/PayPalFormerEmployee1.shtml

      I strongly urge you to read the above before using PayPal for a single new transaction.

    • Veritabletruth

      money order via the US post office?
      i used to operate that way when i was in my 20’s…
      obv. it’s not for ppl who want to invest and have lots of cash or gold on hand…
      but for ppl like me-more under the radar w/not much cash/artist/traveller types-it was perfect….money orders were cheap….and readily available. Add the cost of a stamp…and i still think there is more anonymity and less bureacracy this way

      I agree-i like to survive and thrive w/o a financial institution at all…it’s a very freeing feeling/reality.

    • puckles

      I believe, although I am not certain, that one can still open an account with Goldmoney, which is domiciled in the Channel Islands for very good reasons.

  • Eric wt

    Simon are you nuts? Belize is no longer a safe banking haven. They will do whatever the USA wants. They have no choice. It is not the banks, it is the Central Banking authority that does the dirty work.

    I really respect your work and am happy with SMC, but you are putting peoples money in danger by advising offshore banking in Belize.

  • Mikewaims

    My son lives in Switzerland and I send him small amounts of money (couple hundred dollars) for Christmas birthdays etc. His bank will no longer accept my checks for him to deposit. This may be happening faster than we think.

  • Financial system dropout

    I’m working on becoming my own bank. I’m in the process of closing various bank and broker accounts I have. I will convert the funds to gold and silver coins and put them in a safe deposit box. Silver has tripled in the last 3 years, gold is way up…is your bank account paying you that kind of interest? Do you trust your Wall Street/Washington D.C. bank….or broker? I don’t. They charge you fees while the dollar wastes away. In a crisis, they will come after your funds…you can “bank on that!”
    I’ll keep my PayPal account open since the card is quite convenient for ATM withdrawal worldwide (1 dollar withdrawal fee for me in Thailand vs. 6 dollar fee for my BankAmericard)! If I have to keep a US bank account open, it will be very basic, and only have a few dollars in it!

    • Rningfast

      You better do a Google search on this topic and review your knowledge about safety deposit boxes in a bank, they now can be opened and their contents seized without the need of a warrant !!!

    • Nullifier

      For the love of God, DO NOT put anything of value into a safety deposit box. DHS rules and regulations allow them to enter a bank and sieze anything they deem of value.

      • Zoe3199

        mine has some corn chips and a Snickers bar in it.

    • hammerhead

      I’m not so sure safe deposit boxes are so safe. The thought is that there could soon be new laws that say a banker staff has to be there when you open your box to take inventory and make sure it’s reported so that you can not duck the new luxury tax on those items.

  • Karen23

    Timely advice. I am in Paraguay applying for residency with an American Passport. We have visited 3 banks and they all agreed to open an account until they picked up the phone and called “upstairs” then they suddenly had 10 excuses as to why they couldn’t open an account at this time. “Upstairs” is the central bank in Paraguay.

    Finally we were able to open an account today by using only my husband’s EU passport. While I have 2 passports and could have avoided this, it was not an option since I have an American birth certificate and needed to apply as an American here. My fixer has never had this problem with any of her EU customers. This could pose a big problem to other Americans who think that Paraguay residency is the answer! The doors are closing fast so don’t walk – RUN!!!

  • http://pulse.yahoo.com/_CWHKP7FPRRWWIYOF5S5ICBATQE Realist

    The “exit tax” as it is named here in the U.S. is %50 now. Odumba wants it to be %100. In effect the “government” wants it to be illegal to take OUR money out of the country. I am leaving before that happens.

  • Gunownershipisacivilright

    There was no global depression in the 1920s. This information is not correct. It was not called the roaring twenties for nothing.

  • http://metalstar.tumblr.com dudeman

    thank you for this. ive had my eye on central america for some time, looking into making a small deposit sounds like a good idea.

  • Ace428

    Simon, What languages are important to learn for international business communication?

    • http://www.SHTFplan.com Mac

      Ace, personally I think Chinese and Spanish, in addition to English are the way to go. With South Americans and Asians emerging into the global marketplace, these will be essential languages for future commerce. Currently, we have our kids studying Spanish, and will soon be putting them into Chinese language classes, as well.

      Of course, if the Federal government and the Texas school district are to be believed, then Arab is a ‘language of the future’ also – but I, for one, am not really interested in operating in the Middle East anytime in the future.

      SHTF Mac

  • BecB

    All makes sense and you can certainly see the writing on the wall with some of the things that are already happening. You talk about what Americans can do regarding their IRA or retirment fund…. any comments on what us Aussies can do about ours?

  • Dboy

    Good article. I would like to mention that one should be careful doing ETF/wire transfers from a domestic bank to your foreign account. This link will be noticed. I much prefer carrying the cash to the bank in person (obvious risks of course), and while at the foreign location, making max daily w/d from ATM and depositing that as well. When carrying cash out of the country, use US $100 bills as they will likely get you a slightly better exchange rate than 20’s. Make sure the bills are very crisp and clean, with no marks on them. I often go to the bank and exchange $20’s for hundreds, and I ask the teller for clean bills. It’s never a problem.

  • Kbpi

    All your retirement accounts are now belong to us.

  • Toddmccown

    I keep hearing about the need to open an overseas bank account and store gold overseas. Assuming the govt eventually makes it illegal for Americans to own gold or have overseas bank accounts – wouldn’t anyone who did these things be forced to repatriate or become a criminal? I want protection, but can’t see taking my family to a foreign country and living like an outlaw…

  • Fstruning

    forget about bank safety boxes, under the new nsa rules all boxes are subject to be opened and all coins, bill etc… etc.. can be seized at the discretion of the government agent doing the search, and all that without even a search warrant, do Google that topic and stay informed…..

  • Truth Machine

    My god, what ever you do, DO NOT put any gold or silver in a bank safety deposit box. That is the most dangerous thing you can do.

    Why are people so damn stupid to put they’re valuables at risk. Safety deposit boxes are the FIRST place the FEDS will raid and your stuff will not be returned.

  • KRT

    Hi Simon, what do you think of using GoldMoney as an offshore account? In my mind its great because you kill two birds with one stone. You can hold cash and bullion in your account. Thanks

    • sbj

      What about buying some bullion in the Perth Mint and storing it there? I hear you can do this and then call them, ask them to sell and send to your local bank account…wherever that is

  • MDE440

    Simon with the talk about the government taking over peoples IRA’s and 401k’s and replacing them with GRA’s, how does that prospect fit in with Terry Coxson’s Open Opportunity IRA? Couldn’t Big Brother still “take” it?

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