July 6, 2010
Berlin, Germany

Last Friday, I read about how the US workforce shrank by over 650,000 in June, one of the sharpest contractions ever. Private sector hiring was also less than expected, suggesting that joblessness in the US will remain sluggish.

Always ready to spin a bad story, US politicians immediately began heralding the jobs data as clear evidence that the tide was turning, that the US economy is headed in the right direction, and that their lavish stimulus plans are working.

This gorilla math is truly amazing; it’s the doublethink from 1984 that makes 2+2=5.  So… I decided to do a little number crunching of my own, and the results are pretty incredible.

The ‘recession’ officially began in late 2007, coinciding with the government’s fiscal year 2008 budget.  At this point, politicians became nervous and started dumping money into the economy, which has continued to this day.

What I wanted to do is find out how much money they’ve really poured into the economy, and what the overall impact has been.

I started by looking at the US budget in 2007, which ended September 30th of that year. This was pre-crisis, before the bubble really burst and things got bad. That year, the US budget deficit was ‘only’ $160.7 billion… this is the amount that the government required to function that year– conducting a two-front war, providing social security, etc.

Realistically, if the government hadn’t started its anti-recession stimulus programs, the fiscal year 2008, 2009, 2010, etc. budget deficits should have been $160.7 billion or better; essentially, the government should have spent as much in 2008 as it did in 2007, barring the recession.

Next I added up all the additional deficit spending above and beyond the 2007 level… and then subtracted the hundreds of billions that went to bail out the banks, unions, and big businesses.

The remainder reflects the amount of money that the US federal government has spent since October 2007 to fight the recession, stave off foreclosures, and boost the labor market.  The total amount? About $1.7 trillion in just under 3-years.

I then wanted to find out what kind of impact that spending has had on the economy, so I compared GDP from 2007 through the first quarter of this year.  You would expect that if the government invested $1.7 trillion in the economy, that there would be at least $1.7 trillion in additional economic growth.

Needless to say, this wasn’t the case. Since the end of 2007, the economy has only grown by $476 billion, if you actually trust the government’s inflated numbers to begin with. Even taken at face value, this means that the government has generated a return of $476 billion on an investment of $1.7 trillion.

Let me put this another way– the US government effectively lost 72 cents out of every dollar that it spent on ‘economic stimulus’ since the recession began.

And as for the 8 million jobs that have been lost in the meantime?

With $1.7 trillion in additional deficit spending, they could have paid every single unemployed person in the United States an annual salary of $75,000 for the last three years to sit around and play tiddlywinks all day.

Adding insult to injury, despite racking up a $1.7 trillion bill to fight the recession, politicians remain awfully proud that they increased unemployment benefits by a whopping $25/week, or about $1,300/year.  I’m really wondering what happened to the other $74,000….

Most politicians believe in Keynesian economics, that government spending is a righteous corrective mechanism to economic decline.  As a free market guy, I find this entire philosophy offensive. Individuals and businesses know how to spend their own money better than the government does.

Even if we momentarily suspend disbelief, though, and agree with the philosophy of massive government spending, just look at the results– they lose 72% of the stimulus money, yet they want to keep doing it over and over again.

This is not a Democrat or Republican issue, this isn’t about Obama or Bush, and it’s not even a US issue.  This is simply a structural failure in the system itself: government cannot be trusted under any circumstances.

At the end of the day, regardless of the guarantees and welfare programs that governments promise, we are all fundamentally responsible for ourselves.  No one should trust in the government to be there when it comes time to retire, look for work, or pay for the hospital bill.

Believe it or not, this is a good thing, and I’m optimistic in their serial failures. In my opinion, the sooner people realize that they’re ultimately in charge of their own destiny, the sooner they’ll find an entire world out there full of incredible opportunities.

Planting multiple flags is a great way to protect assets and safeguard against sovereign risk… but keep in mind, it’s also the best way to maximize the opportunities available to you, both personal and professional.

The world is not full of doom and gloom. Yes, our political leaders are a bunch of idiots, but we can rise above that easily and find new possibilities everywhere to secure and improve our lives and the lives of our families. This is one of the most important points that I hope you get out of these conversations.

June 29, 2010
Oxford, England

My apologies for not writing to you yesterday… I was angry (a rare occurrence for me), and I hate writing to my friends when I’m angry. You see, the G8/G20 summits took place over the weekend in Toronto, and everything about these events simply boils my blood.

To me, there’s nothing more utterly worthless than a bunch of corrupt, irrelevant, incompetent bureaucrats who generate enormous pomp and circumstance to gather together at taxpayer expense in order to accomplish absolutely nothing.

Yet this is what happens at these ’summits’ year in, year out.  They’re not exactly staying at the Holiday Inn Express, either. The events are always in some posh resort where legions of underlings can enjoy champagne and filet mignon, courtesy of Joe Public, all the while their bosses strut and glad hand in front of the cameras.

This year, the focus of the summits was on the state of the world economy. They spent the weekend arguing, debating, and deal making… yet by Sunday evening, the only real accord reported by the group was an insipid statement about halving budget deficits by 2013.

The truth is, these summits carry absolutely no weight whatsoever; the G8/G20 are not sovereign bodies with any authority to enforce any of the resolutions. At the end of the day, each of the member countries is going to march to the beat of its own drum, no matter what it may have signed up for at the summit.

Regardless, the media ate it up.  Newspaper headlines around the world heralded the governments’ progress to reduce their budget deficits… apparently failing to realize that half of a budget deficit is still a budget deficit, generating yet another uptick to the national debt.

I’m sure that years ago these summits probably mattered. Back when the United States was the undisputed world economic power thanks to devastated post-war economies in Europe and Asia, the annual summits were a great way for the US to bend the rest of the world to its own agenda.

Decades later, the results from this summit paint a very clear picture about waning US influence. American priorities going in to the summits– sustaining government stimulus programs, cooperation in Afghanistan, currency flexibility in China, etc. remain unresolved and conspicuously absent from the groups’ final reports.

It’s obvious that other countries, particularly the ‘emerging’ G20 nations, have achieved significant political power on the international stage, and this is the surest sign of a major shift in the global balance of power.

One day, I expect that, if these summits still exist, it will be a platform for China to dictate the rules, and for the rest of the world to follow. In the meantime, they will continue to be worthless and wasteful, furthering governments’ record of unsustainable largess.

Needless to say, voters are understandably unhappy about this– the ‘leaders’ who gathered in Canada this weekend are the same people who have been effectively stealing from their voters and squandering every penny on wasteful programs designed to get them re-elected.

Despite nearly 2-years and trillions of dollars spent, little has improved. Politicians can smile in front of the camera and talk about how wonderful the global economy is, but the people standing in the streets have an entirely different perspective. Protesting at the summits is one small way for them to express their views.

This is the thing that made me so angry: Canada spent over a billion dollars of taxpayer money to turn itself into a police state and send a very clear message– that the government is the boss and in complete control, and all the little people singing in the streets will be stamped out like bugs.

All weekend long, riot police viciously assaulted unarmed, nonthreatening protestors in the streets of Toronto, as well as designated ‘free speech zones.’ Sure, there were a handful of people who shattered windows and even lit a police cruiser ablaze, but the vast majority of protests were entirely peaceful.

After the weekend, politicians (including the Mayor of Toronto) stepped up to defend the police actions and sell the public on the idea that assaulting peaceful protesters is a reasonable way to maintain order.

I find myself disgusted by the idea that serially, criminally incompetent politicians can pillage their countries, then hide behind armies and police forces, protecting themselves against the public that they’re supposed to be representing.

The big question I have is, why does the government even bother holding these events in a city like Toronto?  They could have gathered anywhere in the world, such as a remote province in northern Canada.  Yet they chose a major population center instead.

I think they made this decision on purpose, hoping that protesters would show up en masse so that they could send the message loud and clear: If you question the government’s authority, you will be crushed.

It reminds me of that quote from the very prescient book, 1984, “[i]f you want a picture of the future, imagine a boot stamping on a human face—forever.”  I think it serves as yet another reason to get busy planting flags and diversifying away from all of this ugliness.

Tell me what you think about it– I’d like to know.

June 18, 2010
Madrid, Spain

Long haul flights from South America generally tend to leave in the evening, usually between 7pm and 1am. The airlines do this so that you arrive first thing in the morning and can catch any connecting flight you may need… which is nice for travelers.

The flight schedule does make things a bit inconvenient prior to departure, though.  Even with a late hotel check-out, you’ll have about 5 hours to kill before heading to the airport.

This happened to me yesterday in Rio, so I took the opportunity to work on my tan a little bit on Ipanema beach. Even though it was just a normal winter weekday afternoon yesterday, you would think they were having a supermodel convention at the beach given the abundance of bronzed beauties.

It’s no wonder why Brazilians are so carefree about life… how can you feel despondent when you’re immersed in warm weather, sunshine, mountains, the ocean, and gorgeous, friendly people?

After the 11-hour Iberia flight (average business class, in my opinion), I now find myself in Madrid, where I’ll spend the day before heading to London to meet up with some friends and Atlas 400 colleagues.

I’ll have more to follow on my plans next week; you may be interested in what I have in store regarding passports later this month. For now, let’s move on to this week’s questions.

Starting off, I got a chuckle from a comment by Garth this week when he said “the rose colored classes are on,” in response to an article about Rio. I thought I should take a moment and explain something about myself.

Here’s my confession: I am an unabashed optimist. I tend to see the good in everything– people, situations, and countries.  Even in the midst of chaos, my natural instinct is to see opportunities. There’s too much negativity in the world, and I’m weary of cynics who dwell on it.

You can always count on me to be candid about my thoughts, but don’t expect me to obsess over the negative aspects about a country. I will acknowledge them, and then move on… if a country’s issues are so serious that I don’t think you should consider planting a flag there, then I won’t even bother writing about it.

I recognize that people potentially base major life decisions on the information provided in this letter; this is a responsibility that I take very seriously, and I have a few simple rules that I follow which guide me as I write.

First, I won’t ever suggest a country that I wouldn’t recommend to my own mother. Second, I only discuss multiple flag tactics (banks, passport programs, corporations, etc.) that I have first-hand experience with and can vouch for.

Third, I won’t negatively bias someone’s opinion about a country simply because I don’t personally like it… I realize that not everyone shares my taste. As such, I tend to focus on the good points. If there’s not enough good points to consider, then it won’t be on my list. Simple.

Moving on, JT writes, “Simon, what are your thoughts on renouncing US citizenship?”

Renunciation is a decision that more and more people are making each year. The movement is still embryonic, but I expect the coming years that there will be great waves of Americans taking this step.

For most people, the chief reasons are generally financial– they no longer feel comfortable making Uncle Sam a 40% partner in everything they do around the world.

One thing’s for sure– no one should make this decision for emotional reasons because they hated Bush or hate Obama. These guys are as ephemeral as last night’s meat loaf. The decision should be made pratically with a well-reasoned financial analysis.

It is absolutely possible to mitigate or defer tax liability by properly planting multiple flags (i.e. business structured in one location, consumers in another, banking in another), but the ultimate tax break will come only when you renounce.

If you take this step, you have to pay a one-time tax to Uncle Sam as if you had liquidated all of your assets and taken the capital gains. Sammy gives you a $600,000 tax-free allowance and taxes you on the rest.  I’ll have more on this in a future letter; it’s definitely a topic worth discussing.

Next, Deiter asks, “If one were to disclose the existence of a foreign bank account, wouldn’t that make it accessible to frivolous lawsuits?”

Great question. One of main benefits of planting multiple flags is diversifying your sovereign risk so that your assets are no longer exposed to government agencies, tax authorities, and the court system.

Just because you disclose your assets, either due to government regulation or in a court-ordered discovery process, doesn’t mean that your assets are exposed. Let’s say you own property, for example, and you lose a court case… the judge decides that your property should be awarded to the Plaintiff.

Well, if that property is located within the court’s jurisdiction, then the judge can simply have the title conveyed to the other party. If the property is located overseas, far away from the court’s jurisdiction, then they have no power or authority to forcibly convey the title.

The same thing goes for bank accounts, gold stored overseas, etc. When you move assets overseas, you are effectively removing those assets from the jurisdictional authority of your home country.  Disclosing those assets as required by law does not eliminate that benefit.

Lastly, Dave asks, “Simon I’m curious. As a PT, what do you do for postal mail?”

Does anyone still use postal mail? My banking/credit card statements are all email, and if I need a parcel sent to me, I usually just give the hotel address where I expect to be staying by the time it arrives.

If you get a lot of postal mail, you could try the Swiss Post Box service. They’ll receive your mail, scan the envelope, then forward/shred/scan the contents upon your instructions.

That’s all for this week, have a great weekend.

June 7, 2010
Panama City, Panama

My weekend in New York City with fellow Atlas 400 members was really spectacular and first class all the way. There were about 50 of us in total, all with varied and interesting backgrounds from all over the world– a renowned heart surgeon, a music business mogul, a couple of best-selling authors, successful entrepreneurs, etc.

I want to tell you a lot more about the event because I think it underscores how important it is to develop diverse personal relationships bound by common philosophical beliefs… but today I want to spend a few moments talking about something else– Panama.

I stupidly booked myself on a rather unfortunate 6am flight from New York to Panama on Sunday morning. I’m not a morning person, so I don’t quite know what I was thinking, but it ended up being rather serendipitous.

Prior to takeoff as I was resting in my seat trying to ward off the prior evening’s wine selection, a man sat down in the seat next to me and immediately began striking up some idle banter… I’m sure you’ve been there– chatted up by an early morning type A personality who apparently receives caffeine intravenously?

In most cases I’d be polite enough to explain that I need to snooze… but for this gentleman, one quick glance out of my half-opened eyes sent the alarm bells blazing… his entire appearance screamed ‘US government agent.’ It might as well have been tattooed on his forehead.

I perked up and look around a bit more, noticing 5 or 6 more of the usual suspects– all of whom were with me in the first class cabin, mind you… that’s US federal tax [debt] dollars at work.

Given my past experiences with these types, I’ve found that a lot of them take pride in what they do, and they want you to know it. For ’security’ reasons, they can’t tell you exactly what they do, but they’ll dance around the issue until you’re convinced that they’re either Jack Bauer or James Bond, even though it’s not true.

As a rule of thumb, the guy who tells the loudest war stories is the one who was the furthest away from combat. Needless to say, my seatmate regaled me with ‘hypothetical’ stories about drug busts, asset seizures, and money laundering operations, with the standard caveat of “well I can’t give you any specifics, but…”

Here’s the big takeaway that I want you to understand: Panama has a small army of US government representatives crawling around, including military and drug enforcement in particular.

It’s also been reported that the IRS is even setting up an office in Panama, though my sources on the ground here have indicated that this has not happened… at least, not yet.

A few years ago, Germany shocked the world when it announced that one of its intelligence agencies had infiltrated Liechtenstein’s LGT bank by paying a 5 million euro bribe to a bank employee for information on 750 foreign account holders.

It seemed rather strange to me that Germany publicly acknowledged that it had covertly invaded another sovereign nation, and induced a local of that sovereign nation to violate the law.

Most people didn’t seem to take notice of the legality of Germany’s actions… instead, the global community cheered Germany’s efforts to crack down on financial privacy.

Frankly, I wouldn’t be surprised if the US government were engaged in similar activities. I don’t know of too many bank employees in Panama (or Belize, Cayman, etc.) who would turn down a few hundred thousand dollars to provide a list of foreign account holders.

Here’s the bottom line: governments are waging a dirty, no holds barred fight against financial privacy, and the penalties are severe. If you don’t disclose a foreign account as a US taxpayer, the IRS thinks that it’s entitled to 50% of the account value. In Australia it’s even more Draconian.

Consequently, you shouldn’t open a foreign financial account in the hopes of hiding money… that’ll just land you in court next to Wesley Snipes.

You should, however, open a foreign financial account in order to protect your savings from exchange controls, confiscation without due process, frivolous lawsuits, currency depreciation, and more. It is probably the single most important flag you could plant for your money.

Afterwards, don’t make a secret of it. Ensure you follow the proper disclosure protocols for your home country… in the United States, that could mean IRS 1040 schedule B and Treasury form TDF 90-22.1.

Despite the presence of so many government agents, I still think Panama is a reasonable place to bank, especially for smaller account sizes. The institutions are solid and well capitalized, and many of them still work with North American citizens.

Belize is another jurisdiction to consider for smaller account sizes, between $10,000 and $250,000. Beyond that, I would strongly suggest more developed jurisdictions like Switzerland, Hong Kong, and Singapore.

Meanwhile, if you’re really looking to go ‘off the grid’ with your money, your best bet will be nonreportable items like precious metals and real estate… but we’ll save that for another time.

May 27, 2010
Chicago, IL, USA

Uruguay is one of the countries that generally receives a lot of praise and positive commentary in the expatriate blogosphere. It’s often referred to as the “Switzerland of South America,” or compared directly to Paris… probably by people who have been to neither Switzerland nor Paris.

The truth is that Uruguay is a very pleasant country in many respects. It’s relatively clean, quiet, safe, and not very corrupt. Punta del Este, more specifically, is a great town with a hip and sometimes chaotic nightlife for a few months out of the year.

Other parts of the country can leave a bit to be desired… the poverty, blight, and disrepair are more noticeable, and a ridiculous array of taxes and high import duties ensures that only the wealthiest residents have access non-basic goods.

More importantly, though, Uruguay’s reputation as a tax haven and offshore financial center is completely undeserved. I’ve been saying this for a while, most recently on February 26th of this year. It appears that the government is now trying to put an end to the argument altogether.

It started in 2007 when the government imposed a personal income tax. Over the last few years, the country has laid down for the OECD, reducing its attractiveness as an offshore banking center.

Now, Uruguay’s left-leaning government, led by President Jose Mujica, recently unveiled draft legislation to tax all residents on their worldwide income, as well as a wealth tax on the $8 billion worth of assets that Uruguayan residents hold outside of the country.

As the vast majority of Uruguayans have no income or assets outside of the country, the new tax code changes only affect wealthy locals and foreign residents… a small minority in this country of 3 million people.

While the Uruguayan culture is typically not one of blood-sucking socialism at all costs, the enormous demographic gap between those with assets overseas (a small minority) and those without (the majority) suggests that the bill will likely become law.

In my book, this knocks Uruguay off the list of countries where someone should live as a declared resident. It may still be a great place to spend a lot of time, though it would be much more advantageous to do this as a perpetual tourist.

Specifically, one could establish permanent residence in a place like Panama or the Bahamas, then live in Uruguay as a tourist. US, Canadian, and EU citizens are allowed to stay in the country for 90-days at a time; once the 90-days are up, you can hop a 1-hour flight to Buenos Aires, spend the weekend, and fly back to Uruguay.

It’s unclear right now whether Uruguay’s new measures create a tax liability on the worldwide income of non-resident Uruguayan citizens; if not, an Uruguayan passport may still be a reasonable document to acquire… as long as the applicant doesn’t plan on living in the country.

For example, one could travel to Uruguay, establish permanent residence, pay the taxes for 3-years, acquire Uruguayan citizenship, then leave the country for good.

Overall though, I think there are much better options– Paraguay, Brazil, Chile, and even Belgium.

More to follow.

May 19, 2010
Quad Cities, IA, USA

I wanted to send you a short note today from America’s heartland to tell you what I’m doing with my investment capital, and why.

I’m closing out almost all of my speculative positions and going to sit on the sidelines for a bit because I’m concerned that the markets are entering another major deleveraging period.

Here are the facts which concern me-

1) Interbank lending in Europe is on the decline. Banks are now hesitant to lend to each other for fear and skepticism of what may be on others’ balance sheets; sovereign debt default has everyone worried, and lenders are mistrustful of anyone who may have exposure to the PIIGS.

The consequence is that European banks are now sitting on their cash and not extending credit to businesses, consumers, and investors. As the modern financial system depends entirely on the availability of credit, a major reduction in credit curtails output and demand, reducing asset prices.

We saw how a credit crunch affected asset prices in 2008, and what’s happening with European banks right now is similar.

2) Markets have been incredibly volatile lately, and this trend is likely to persist in the near term. Extreme volatility can often cause capital flight from risky markets, either due to margin calls or risk aversion.

When capital flees markets, prices fall. We also saw this in the autumn of 2008.

3) Government intervention is on the rise. Yesterday, Germany dropped an 800 pound gorilla on the markets by announcing a series of bans on certain short trades. Among the consequences is that credit markets now have reduced capability to hedge their exposure to risky sovereign debt.

In Switzerland, the central bank (SNB) has dramatically intervened in the currency market, boosting the euro by over 225 pips against the franc for a roughly 1.4% gain overnight. This is a huge move for a major currency.

History shows us that government interventions do not stabilize the markets. At best, intervention discourages private capital from participating in the markets; at worst, intervention encourages gross misallocations of private capital by trying to second-guess future interventionist moves.

Either way, the effect is negative for markets and asset prices.

4) Substantial risks still exist which could cause another leg down in the markets and create more capital losses for banks. These risks include sovereign debt erosion (which is happening), continued rise in foreclosures (which is happening), and a major currency crisis (which is unfolding).

In each of these cases, the net result will be reduced lending and credit availability as banks have to focus on rebuilding their balance sheets and increasing loss reserves.

Again, we saw the effects of these risk factors in 2008. Banks have been on the sidelines ever since, and the consequent lack of credit availability created major cash shortages in the broader economy.

The result is a fire sale of all assets, which causes steep price declines.

To be clear, I think this will affect the gold market as well, mostly because of the reciprocal effect of ETF instruments. The SPDR Gold ETF, better known as GLD, is allegedly the largest private holder of gold in the world.

In the event of a market meltdown, significant sales of ETF shares trigger a sale of gold holdings, which would in turn cause a further decline in the ETF shares, triggering more sales of gold holdings.

It’s a cycle of momentum. Just as we saw oil prices quickly rise to $147 in 2008, the inverse of this cycle is a rapid unwinding. Gold could get caught up in this because there is so much ETF exposure. Consider this if you are holding gold for speculative purposes.

Silver, however, would likely fall even more… and that’s why a bet on a rising gold/silver ratio is one of the few speculations that does make sense to me right now. I could see it rising from 63 to 75 or 80 in the near future.

In full disclosure, none of these assessments is a foregone conclusion in my book, but I see enough risk in the marketplace to take my speculative cash off the table… and that’s really what I wanted to tell you today.

I don’t have a high risk tolerance with my money, and when I see one ‘investment professional’ after another on CNBC telling me why I should jump into the markets because everything is rosy, I get really nervous.

The truth is that until there is some finality with the challenges in the eurozone (which will take quite some time), I don’t see how the markets can do any better than trading sideways.

May 18, 2010
Undisclosed location

You know by now that I generally don’t spend very much time in the US.

I think there are more desirable places out there… and to me, the US is just like any other country in decline like Italy or Spain– I really enjoy it as a tourist, I just don’t care enough for the politics or media to stay for long periods of time.

That’s one of the benefits of being a permanent traveler with no fixed home: I have the luxury of not being constantly force-fed propaganda that spreads fear and ignorance.

When I come back to the states, though, I feel like there’s a political agenda being thrown in my face everywhere I look. One of the most pervasive, from my outlook, is this notion that the economy is rosy, and that the government has everything under control.

I think this is absolutely ludicrous. The government doesn’t have anything under control, including themselves. Instead of putting the country on sound financial footing, they’re doing the exact opposite– spending without limit, borrowing without regard, and furthering a culture of entitlement.

Congressman Ron Paul was on CNBC yesterday talking about these same issues. He criticized the administration and Congress for their reckless spending, and he railed against the Federal Reserve for inflating away the currency and bailing out select banks.

For whatever reason, his ideas don’t seem to resonate with the public. Becky Quick even chided the Congressman for his bullishness on gold as a more effective store of value than paper dollars.

In fact, a bit of basic math shows us that, since the dollar became a worthless piece of paper in 1971 when Nixon left the gold standard, gold has generated a 9.2% annualized return in dollar terms, while stocks have only returned an annualized 6.6% and bonds about 8%.

Now, I’m not a gold bug, but I’d rather take my chances on this ‘barbarous relic’ than on a worthless piece of paper controlled by bureaucrats.

(Actually I prefer ammunition as a store of value, but I’ll save that for another time…)

Think about it– the entire modern financial system is based on a very small group of people having the power to create money out of thin air. It’s obvious that this is corrupt and unsustainable.

So is borrowing trillions of dollars each year.

They (the government) think that we can simply grow our way out of debt… that if the economy has a big boost, the size of its debt won’t matter very much in relation to the size of our economy and consequent tax revenue.

This is also completely ludicrous. If every single person in the US were to pay 100% of his/her salary for the next year to the federal government in taxes, it still wouldn’t be enough to pay off the debt– the US would still be a few trillion in the hole.

That’s just a pipe dream anyhow. The government is going to give the largest voting blocs even more tax cuts and entitlement programs, then stick the bill to (1) future generations; (2) those who are unprepared to deal with inflation; (3) productive citizens who generate wealth and create jobs.

We can see this already happening around the world.

In Portugal, their government has even gone so far as to introduce a special ‘crisis tax’ to bring down that country’s deficit… punishing the entire population for decades of politicians’ mismanagement.

In Australia, that government is singling out the resource industry and charging them with a special tax to redistribute mining profits across the rest of the economy.

Sure, that sounds like a great idea, mate. Penalize your most profitable industry that provides ample jobs and wealth, then choke off the profits that they need to reinvest in exploration and extraction technology. That ought to be good for long-term growth.

Unfortunately, this is only the beginning. You can expect even more Draconian measures in the countries with the most desperate balance sheets– that’s the PIIGS, the US, and Japan.

Here’s the good news: As an expat, all of these measures are largely meaningless. When you’re a ‘permanent tourist’, governments compete for you rather than try to bleed you dry. They want you to spend your time and money in their country, and they’ll do whatever it takes to attract you.

I think there’s going to be a massive wave of expatriation over the next few years, and it’s already begun. Everyone has a breaking point, and a lot of people are going to be reaching theirs very soon.

The solutions are already out there– offshore bank accounts, foreign property, tax residency, second citizenship, etc. It’s simply a question of will and mental attitude.

Are you seriously considering expatriating or at least planting flags internationally? What’s your single biggest question about it? If not, what’s holding you back?

May 13, 2010
Undisclosed Location

Ask yourself an important question: how will you know when the proverbial fat lady is about to sing?

In our regular conversations, we talk a lot about the importance of being prepared… history is full of examples of pigs that got slaughtered for not being prepared, for not heeding the warning signs, and for waiting until it was too late.

For example, we may be able to agree that major currencies like the dollar, pound, euro, and yen are all ‘headed to zero.’ Much is written in the financial blogosphere about the fundamental weaknesses of these currencies, and of the massive, untenable debts that their governments have assumed.

But what does it actually mean when a major currency ‘goes to zero’? How will the world function afterward? And most importantly, how will we know when it’s happening?

As we have discussed before, institutional wealth is generally held and denominated in one of the three major currencies– the dollar, euro, and yen. Why? Because they are the only ones large enough to consistently absorb institutional capital flows.

To put it more clearly, if $50 billion moves into the Costa Rican colon, the colon will spike. If $50 billion moves into the yen, it will barely register a blip.

These three currencies effectively represent the three dominant economies in the world– the Eurozone, the United States, and Japan. As you’re undoubtedly aware, these are also the places with the most debt, hence the largest bond markets where capital can freely flow in and out of.

Each day, however, it appears that investors are losing confidence in these struggling economies. Europe has been the first on the chopping block, and I suspect that Japan won’t be too far behind.

As Europe and Japan fall out of favor, the US bond market is the ‘winner’ by default, at least for the short-term. Investors require a highly liquid, low risk medium to park their capital, and the US dollar is simply the “least worst” of the three major currencies.

Make no mistake, though, institutional investors are looking for an alternative.

This is one of the reasons why gold has been going through the roof, and will likely continue to do so– investors are now starting to choose the gold market to store their wealth rather than rely on suspect bond markets.

The gold market is so much smaller than the major sovereign debt markets, though, so it is not a viable alternative. Gold prices will certainly benefit

So what else is out there? Is there another country with trillions upon trillions of dollars worth of currency units whose large, growing economy inspires the confidence of global investors?

Almost, but not quite… though I think China could be there in a few years.

China is already one of the world’s largest economies, and will likely become THE largest economy by the end of the decade. Furthermore, its substantial pool of savings and ability to produce (rather than compulsively consume and import) certainly inspires the confidence of investors.

Like other governments, Chinese policymakers have inflated their currency; there are trillions of renminbi circulating in their economy. At the moment, though China has some of the world’s tightest exchange controls, and these are what prevent China from being a viable alternative right now.

The Chinese government presently fixes its currency, the renminbi, to the US dollar; they also do not allow the free flow of capital across borders, which is an absolute requirement for investors.

Over the next few years as China’s economy continues to grow, though, the prospect of a more free renminbi is quite likely, and I suspect that the government will slowly take steps to achieve this.

In the long run, the government wants China (and Shanghai in particular) to be the world’s #1 financial center, and they know this requires an open currency and a highly liquid bond market.

Furthermore, as the Chinese economy shifts away from the Asia export model towards domestic consumption, the government will welcome a stronger currency in order to keep imports cheap and inflation under control.

When this happens, you can be sure that global institutional investors will quickly embrace the renminbi as a new reserve currency, and dump the dollar along the way.

This will be the official end of the dollar as the world’s dominant currency, and you’ll know it’s here when you read in the paper about a major Wall Street firm selling renminbi-denominated bonds for a US company’s debt issuance.

At this point, the dollar will truly have become a worthless piece of paper, and all of the world’s wealth will likely have migrated to Asian financial markets. This is when all confidence in the dollar will collapse, and inflation could spiral out of control.

In other words, the fat lady will be hitting her high note.

I suspect these events could take several years to transpire; in the meantime, though, the major signs to watch for will be significant changes in China’s policy towards a more open currency regime.

Next week we’ll talk more about what you can start doing today to protect yourself and your wealth from a sudden currency crisis.

May 6, 2010
Undisclosed Location

Most people don’t realize how many countries out there are dollarized.

In some countries, like El Salvador, Panama, Palau, Ecuador, etc. the US dollar officially circulates in the economy. In others, like Cambodia and Zimbabwe, the US dollar is the de facto currency, which means that they officially have their own currency, but US dollars are commonly used and accepted for everyday purchases.

Moreover, in other countries like Uruguay and Argentina, high ticket items like real estate generally change hands in US dollars. And finally, in many countries like Venezuela, Ukraine, Saudi Arabia, Hong Kong, Cuba, etc., the local currency is pegged to the US dollar at a fixed rate.

To be clear, there are many advantages to being dollarized. For tourists, it is far more convenient to deal in a major currency. For investors, there is generally less stability risk if you don’t have to deal with a third world peso. For business owners and traders, it makes sense to use the world’s #1 reserve currency.

But just as there are a lot of benefits to using the US dollar in a foreign economy, there is one massive, critical risk: what happens to these economies when the greenback finally breaks? What if there’s a run on the dollar, similar to what’s happening with the euro right now? Are these countries insulated? Here’s my take:

The actual currency unit in circulation, whether official or unofficial, is not that important. What is far more important is determining a country’s level of exposure to the United States.

El Salvador, for example, is heavily dependent on trade with the United States; 48% of its exports and 35% of its imports depend on the US… so a substantial dollar crisis which erodes the purchasing power of the greenback and reduces real wealth in the United States will have a devastating impact on El Salvador.

Then again, consider Honduras, which is not dollarized. 62% of it exports and 50% of its imports are bound to/from the United States. Honduras has an even greater level of exposure to the US, so a dollar crisis would likely be even more severe in that country, even though it circulates its own currency.

In contrast, consider Saudi Arabia, whose riyal currency unit is pegged to the US dollar at 3.75/$. Naturally, the preponderance of the Saudi economy is based on its oil exports, which it has no problems unloading to any number of countries across the globe, including China.

If the US dollar started to plummet, the price of oil (in dollar terms) would increase accordingly, and the Saudis would still be generating the same level of inflation-adjusted oil revenue. Net impact to the Saudi economy would be marginal, especially compared to places like Honduras.

We can see a very clear illustration of what would happen to these countries in the future by taking a look at the countries that are affected by the euro’s decline right now.

Take Switzerland, for example, which has its own, independent, time-tested, fairly sound currency. The Swiss economy is heavily dependent on the European economy, however, so as the euro has declined, so has the Swiss franc. Same with the Polish zloty, same with the Hungarian forint.

Overall, regardless of the currency in circulation, the safest places to be (economically speaking) in the event of a dollar crisis will be countries that have an independent source of income and do not depend on the United States for the preponderance of their trade.

Panama is one such example; revenues from the Panama Canal, its perpetual cash cow, will generally be enough to offset the negative impacts of a US decline.

Ecuador, with its reasonably well-developed (albeit de facto nationalized) oil sector, should also limp along just fine, similar to Saudi Arabia.

Peru, Chile, and Brazil are also on excellent footing; each of the three is blessed with substantial natural resource reserves and hungry export markets that are already diversified across the world. Chile’s trading partners, for example, are almost evenly split between China, Japan, the US, the EU, and the rest of South America.

This is a complicated topic, but it’s an important one to understand for anyone looking to plant multiple flags. I’ll be devoting more time to this next week when I talk about the nature of a dollar crisis, what it will look like, and when it will come.

May 5, 2010
Undisclosed location

The last few days have been great for the shorts. I’m one of them. Global markets have been in an absolute panic over what’s happening in Europe, and many major indices have erased their 2010 gains.

Clearly, the most concerning issue of the day is the ongoing trouble in Greece. The government has been borrowing and spending far beyond its means, and far beyond its growth potential for years. Hell, for decades.

Now the country is going with hat in hand to the European Union and International Monetary Fund (what essentially amounts to the United States) for a bailout. Make no mistake, this absolutely has the potential to break apart the euro zone.

At a minimum, bailing out Greece will require substantial cash infusions in order to get the government running again… quite literally, the Greek government is bankrupt, and it will need a lot of money just to limp along from paycheck to paycheck.

More importantly, however, the EU and IMF will have to step up and guarantee large portions of Greece’s $400+ billion public debt. If they don’t, private investors will be simply unwilling to buy all of the new debt that Greece so desperately needs to issue in order to finance its government for the next several years.

Naturally, if the EU (read: Germany) guarantees Greek debt, it will put 100% of the risk (with 0% upside) squarely on the shoulders of German workers.

Now… let’s go back and reconsider the history of Europe. This is a continent that has been at war with itself, or threatening to go to war with itself, for millennia. If we ignore the Balkan conflicts in the 90s, Europe only has a 20-year experiment of patching things up and playing nice.

I’m not advocating that the continent will once again plunge into destructive warfare… but rather trying to illustrate that the average German worker, who already struggles to give half of his paycheck to the government, doesn’t give a damn about ensuring Greece’s generous entitlement programs.

To give you an example of what I’m talking about, a hairdresser in Greece has the right to retire with full benefits at age 50 because the occupation is one of 580 job categories considered ‘hazardous’.

According to the New York Times, which published a list of these hazardous Greek occupations in March, radio announcers and reed instrument musicians are right up there with coal miners and bomb disposal workers. They all get to retire at 50 or 55.

Needless to say, these entitlement programs suggest that Greece’s financial problems extend far beyond its debt. Total government obligations, including its ridiculous pension program, tally nearly 900% of GDP.

It will be impossible to borrow this amount from private markets, and it is absurd to think that Germany would ever consider guaranteeing such a sum.

This means that Greece will have to make massive, massive cuts to its social welfare programs… and this, after all, is one of the prime conditions of its bailout. Greece is to cut government spending to the bones while simultaneously raising taxes to plug its budget shortfall.

Naturally, this is another stupid idea. Anyone with even most cursory understanding of street-level economics knows that raising taxes provides a disincentive for everyone.

If you raise sales taxes (VAT), you provide a disincentive for consumers to spend… in which case, congratulations, you won’t be able to rely on consumer spending to drive economic growth.

If you raise income tax rates, you leave consumers and businesses with less disposable income to allocate towards investments and purchases which will drive economic growth.

If you raise capital gains taxes, you provide a disincentive for entrepreneurs and investors to take risks that will create jobs and build wealth.

If you raise payroll taxes, you provide a disincentive for employers to hire workers.

You get the idea. Raising taxes is the exact opposite of what Greece should be doing right now… and yet, its politicians are surrounded bureaucratic vultures insisting that the only way out of the crisis is higher taxes.

Now– the other side of the equation, massive cuts to government spending, is laudable. But here’s the problem: Greeks have been paying exorbitant taxes for years. They have been misled for decades that their pension programs would be waiting for them upon retirement.

Now that many Greeks have reached retirement age, suddenly the money that they have been paying into the system for their entire lives is no longer there. And the government is telling the Greek people that they are the ones who need to make sacrifices.

If I had paid hundreds of thousands of euro into a system that had effectively robbed me and left me with nothing, I would be angry too. I would take to the streets too.

That’s exactly what the Greeks are doing now.

If Greece were a private company, the officers and directors would be locked up forever. Politicians, on the other hand, control paramilitary forces which quell the rebellion and shoot a few of their own countrymen.

It’s a disgustingly perverse system, and it deserves to go down in flames.

As I’ve stated before, one of the best ways to play this is to short the euro against gold and silver. I recommended this a few months ago at 760, and gold keeps hitting new, historic highs above 910.

For contrarians, taking a small, speculative bet on Greece right now may be a decent, short-term gamble in the event of a temporary pullback– I know some people who are buying National Bank of Greece (NYSE: NBG), for example.

In the longer-term, though, Greece’s financial problems are clearly unable to be contained, even with EU/IMF support. Afterwards, the continent will have to deal with Spain, Portugal, and Italy… and their problems substantially outweigh those of Greece.

What do you think– would you take to the streets too? I’m curious.

April 19, 2010
Quito, Ecuador

I don’t have to tell you that world governments are collectively pushing hard against people who abusively hide money overseas.

Governments’ primary motivation at the moment is to make sure that no one is evading their tax obligations; for now, they don’t care much if you pay taxes on your income, and then transfer after-tax earnings overseas.

In a way, though, their offshore crackdowns have become a self-fulfilling prophecy that is creating its own demand.

People who understand what’s going on are now more motivated than ever to take action using legitimate and available tools– proper use of international business structures, offshore bank accounts, foreign real estate, second passports, etc.

Why? Because they don’t want to get caught with their pants down when the window of opportunity closes.

Someday, and likely soon, cash-starved governments will implement whatever measures are necessary to trap capital within an economy, enslaving people to taxation, regulation, and inflation.

These are called capital controls, and I think that they’re an absolutely certain part of our future… though ‘future’ is the operative word. There has been a lot of insidious legislation passed around the world recently, but none so far has been capital controls, at least in developed countries.

A few weeks ago, blogger after blogger set off a wave of panic across the Internet by announcing that capital controls had, in fact, been implemented in the US. They were erroneously interpreting a new law called the HIRE Act, claiming that certain provisions were tantamount to capital controls.

This interpretation was simply wrong.

Frankly, I’m pleased that so many websites are now paying close attention to expatriation issues. It seems like every time I turn around, someone is sending me an article from a new website that is doling out advice on internationalization.

I think this is fantastic, and indicative of a growing concern around the world. The problem is that most of them are armchair expats handing out monkey see, monkey do information from Google or Wikipedia that is totally inaccurate.

Misinformation can cause panic and even direct financial loss… this is why you want to be careful about your advisers and go straight to the source.

For example, if you want information about international taxation, talk to an international tax attorney, not Wikipedia. If you want to know about expatriation, talk to people who have successfully done it, not the armchair expat who watches CNN International.

This is one of the chief reasons why we are in the process of redesigning our website; it will allow subscribers to connect with each other in order to swap stories and advice based on their own personal experiences. More on that later.

Today, though, I really wanted to set the record straight about the HIRE Act. On March 30th I initially responded to the misinformation about capital controls; in that missive, I promised that I would soon conduct an interview with an international tax law expert to shed more light on the subject.

Today is that day… and if you’re interested in objective truth about capital controls without all the ‘Chicken Little’ sensationalism, I highly encourage you to check out this interview with Mark Nestmann.

In the interview, we’ll discuss:

- What are capital controls and why the HIRE Act doesn’t qualify
- What capital controls will look like when they’re implemented
- Warning signs to watch out for in the future
- What you can do today to protect your savings
- Options for opening a foreign bank account

Mark Nestmann is an uncontested expatriation expert. As a trained international tax lawyer, Mark has been in the industry for two decades and authored many books on the subject.

One of them, the Lifeboat Strategy, is a really comprehensive, actionable guide to expatriation.  If you’re wondering how to develop a legitimate strategy for going offshore, you should absolutely start with his book.

(as an aside, Mark is putting the finishing touches on a new update to the book which he will list at a much higher price. Anyone who purchases the Lifeboat Strategy today at the lower price will be automatically sent the updated version at no charge.)

I hope you enjoy the interview.

April 9, 2010
Panama City, Panama

My time is winding up here in Panama and I’m trying to sort out my travel for the next few weeks. I need to be in the US for two conferences by April 26th, so that gives me about 2-weeks to kill.

I’m thinking about heading to Medellin, Cuenca, Lima, Santiago, Asuncion, Buenos Aires, Florianopolis… but let’s face it, that may be a little ambitious for two weeks, even for me.

If you have any input on what you’d like to see from South America, leave me a comment.  In the meantime, on to this week’s questions:

JC asks: “Simon- Last year, the IRS hired more agents to specifically target those who have offshore bank accounts. Won’t having a foreign bank account now make me more of a target?”

Here’s my take– If you are talented and make any money, you will be a target… and that’s the bottom line.

Considering that the IRS is hiring another 16,500 more agents to enforce the new healthcare bill, you can bet that just about everyone in the US is a target.

You can either have a foreign bank account, keep your money safe, and be a target… or you can not have a foreign bank account, hold your money hostage to excessive inflation, regulation, and taxation, and still be a target.

The only people who will not be targets are the unproductive who receive the handouts… oh yeah, and members of Congress and the Treasury Department.

Alan asks, “Simon- Thank you for the great service you provide. I was looking to set up an alternative residence in Costa Rica, but after your very informative letters I have decided on Panama. Has Panama has signed TIEAs with other countries as requested by the OECD?”

Don’t discount Costa Rica entirely; the country does have something to offer the right person. For my money, though, Panama is more stable, more open, more economically free, and amazingly enough, less bureaucratic.

Regarding tax information exchange– One year ago, our friends at the OECD made a “gray list” of countries that are noncompliant with international standards for the sharing of tax information.

Panama was on this list, and the government committed to achieving compliance… this requires that Panama sign tax information exchange agreements (TIEA) with at least 12 other compliant countries.

As you could imagine, the OECD conducts annual progress reports.  Fortunately, though, the negotiation of TIEAs takes quite a long time.

Panama has started by building a database of double taxation agreements (DTA), some of which have tax information exchange provisions. To date, Panama has finalized DTAs with Barbados, Mexico, Italy, and Belgium, with France, Qatar, and the Netherlands on deck.

My sense is that Panama’s strategy is to follow the minimum standards, drag out the process as long as possible, and avoid the US and Canada at all costs.

Finally, the ‘Captain’ asks, “Simon, you’ve said that governments may appropriate the trillions of dollars held in retirement accounts. Such a law would bring howls of disapproval from retirees– could the government really pull a fast one on such a significant swath of voters?”

Yes, they could. Politicians all over the world have been doing it as long as the concept of government has existed.

To be clear, though, I’m not suggesting outright appropriation; I do believe that governments want to get their hands on retirement accounts as a way to fund their deficits, but it will most likely come in the form of new taxes and regulations.

For example, the government may require a certain amount of retirement funds be invested in their own debt securities; they may also change retirement fund tax incentives, or simply charge an outright fee on accounts that are over a certain value.

In the US, you can already see the federal government trying to get its hands on retirement money; they’ve recently made a regulatory change that allows taxpayers to convert from a traditional to a Roth IRA.

This conversion requires the taxpayer to immediately pay taxes on the gains from their retirement account, effectively giving the politicians an instant windfall that they wouldn’t be entitled to for another 10, 20, or 30 years.

To me, this is step 1 in a long succession of future tax and regulatory changes aimed directly at retirement accounts. Once again, politicians will punish the savers and productive in favor of the idle and irresponsible.

To me, the best way to do something about it is to set up an Open Opportunity IRA– it’s a self-directed structure that puts you in total control of your own retirement money.

With an Open Opportunity IRA, you can diversify your retirement funds in an overseas bank account, foreign property, and even physical gold locked away in an offshore vault. It allows you to plant an important overseas flag with the money that you have been saving for your entire working life.

I’ve mentioned before that my friend Terry Coxon, a renowned economist and best-selling financial author, has released a new e-book that walks you through this structure step-by-step.

If you have an IRA and are concerned about the government targeting your retirement money, I strongly encourage you to consider his book.

April 8, 2010
Panama City, Panama

Do you remember that really awkward phase we all went through as adolescents?

Growth spurts, voice changes, menstruation, and yes, pimples– in the end, while we all came out of it more mature and grown up, there was a difficult and sometimes painful transition period in which we had to learn how to deal with new realities.

Developing countries go through the same sort of transition, and it can be just as awkward and painful.

Typically, they try to transition from fledgling banana republics with corrupt governments and byzantine regulatory systems to stable democracies with a growing middle class and reformed tax code.

Most countries have a very difficult time with this.

For example, I expect China to undergo significant pain as their economy continues to inflate. One day the Chinese will find that their rising currency and wages are no longer cheap, and they’ll have to seek competitive advantage in something other than manufacturing knick-knacks.

In other words, a country of a billion people cannot go from making socks to being the world’s investment bankers overnight, or without any fuss.

These sorts of transitions are very difficult because they affect the entire social landscape– employees are laid off and have to retrain to new skills, businesses go bust and reinvent themselves, etc.  Of course, politicians always get in the way by passing laws which only prolong the pain.

Overall, the transition cycle is not easy, and few countries pull it off well.  In my assessment, Panama is one of the countries succeeding.

20-years ago, with its puppet dictator, open drug trade, and banana exports, Panama was nothing but a bad punch line.  Over the last decade, though, the country has been able to successfully develop a service-oriented economy with robust tourism, banking, and transportation sectors.

Today, while the country is definitely no Shangri-La, Panama is thriving and on a very clear upward trend.

Remember, this is ultimately the most critical point to consider when planting a flag overseas– is the country or jurisdiction on an upward trend? Will it be a better place 10-years from now?

When you survey the political landscape in developed countries, the headlines generally tend to get worse and worse.  Certainly, not all news is bad, but the subversion of civil liberties, erosion of financial privacy, and rapid growth of big government seem to be at least weekly occurrences.

Meanwhile, in developing Latin economies like Panama, Chile, and Peru, things are consistently improving– they are going through the awkward growth phase as smoothly as possible.

As an example, the Martinelli administration in Panama recently passed comprehensive tax code reform.  While increasing the sales (consumption) tax by 2%, it cuts corporate and some personal tax rates, reduces some property tax rates by half, and completely eliminates over 30 types of tax.

This new, simplified tax code is a major step in the right direction, and it will be excellent for business.

The government here clearly understands that successful businesses hire employees and generate wealth in the economy.  This model has done wonders for Singapore and Hong Kong, and Panama is following suit.

Yes, there are still elements of poverty, corruption, drug trafficking, etc. in Panama.  The trend, however, is undeniably one of consistent improvement and greater economic freedom.  Ultimately, this is exactly what helps countries successfully transition through those difficult growth phases.

As I’ve said before, until these economies become large or popular enough, local capital markets tend to be off-limits for armchair investors.  I don’t see TD Ameritrade offering access to the Peruvian stock market anytime soon.

It is possible, however, for intrepid active investors to open local brokerage accounts and capitalize on the rising tide… though the most passive investment opportunities generally tend to be foreign bank accounts (which provide liquidity and exposure to the currency) or property (which is non-reportable and an excellent inflation hedge).

More on these topics in future letters.

April 2, 2010
Panama City, Panama

It’s been a great week so far in Panama. Each time I come back to this country I become even more sure in my conviction that Panama has a bright future.

For the next few days, though, I am going to set aside market forecasts and expatriation strategies… you see, my friends from the Atlas 400 club are starting to arrive, and I’m looking forward to a few days off at the very exclusive Tropic Star fishing lodge in Panama’s Darien province.

The cast of characters attending this event is really impressive– and I’m excited that several members of our own community will be there.

I’ll tell you more about it when I return on Wednesday. For now, though, let’s move on to this week’s questions.

First off, Jeff in Ohio asks: “Simon, thank you for the clarification about the new H.I.R.E. Act, I was really confused and concerned.  Why do so many people continue saying that this new law is the same as capital controls?”

It’s easy to overreact and say that the sky is falling.  To be fair, a layman’s reading of the bill makes it seem like the government is imposing a 30% tax on foreign bank transfers… but that’s exactly why I had my team of tax attorneys and CPAs analyze it– I wanted to know the truth.

The truth is, the H.I.R.E Act is an administrative enforcement of tax reporting; it’s bad news, but it’s no more capital controls than the qualified intermediary rules or withholding requirement for some payments to foreign companies.

The big problem is that this new law provides a disincentive for foreign banks to work with US customers… more and more, Americans are simply not worth the hassle for foreign banks.

There are still solutions, though. Americans who want to open a foreign bank account (as everyone should) ought to consider larger multinationals that already have a US presence. They’re accustomed to the paperwork already and are less likely to turn you away.

There are, of course, other jurisdictions that frankly don’t care much about the H.I.R.E. Act, and we can discuss those more in the future.

Steve writes, “Mr. Black, is Panama still self-reliant and independently wealthy if income from the Panama Canal drops off?”

This is a good question. Panama is heavily dependent on the Panama Canal, just as Saudi Arabia is heavily dependent on its oil supplies.

Fortunately, Panama has been able to diversify its economy away from transportation and trade– banking services, real estate, tourism, customer service, and others… but the Canal still generates the preponderance of external economic activity.

If global trade were to take a major hit (as it did in 2008/2009), Canal revenues would certainly decline and Panama would suffer economically… but bear in mind that Panama still posted positive economic growth last year.

I suspect that major economic pain would come only with a cataclysmic reduction in Canal usage, either due to another economically viable transportation route in the western hemisphere (unlikely) or a total collapse in global trade.

Mark writes, “Simon: I am a 65 year old disabled retiree.  Later this year I will have about $30,000 per year to reside on. Can you give me several ultra low-cost living places to consider that have SOME civilization?”

Everyone has different personal tastes and circumstances, but here are some ultra cheap countries that are safe and reasonably civilized: Malaysia, Ecuador, Thailand, Sri Lanka, the Philippines, Egypt, India, Paraguay.

There are more, but this should be a good start.

Anonymous asks, “Simon, if I have a civil judgement ruled against me, would that disqualify me from a second passport?”

No, not in most cases. Most countries require a medical exam and a criminal background check. If you have a felony conviction, that’s a red flag. Civil judgments are usually not problematic… you’d undergo more scrutiny testing positive for syphilis.

That’s it for this week. Remember, I will be at the closed-door Atlas 400 event for the next few days in the middle of the jungle, so you will more than likely not be hearing from me until next Wednesday.

March 30, 2009
Panama City, Panama

I’ve been flooded with emails over the last few days about new law in the United States that many people believe to be government imposed exchange controls. Here’s the deal, in case you haven’t heard:

On March 18th, President Obama signed into law the innocuous sounding “Hiring Incentives to Restore Employment Act.” Buried in the bill are several provisions that impose new taxes, penalties, and requirements regarding the reporting of foreign bank accounts.

One of the biggest issues is that the bill imposes a 30% withholding tax on most US-source income paid to foreign financial institutions which do not comply with IRS reporting requirements.

Essentially, Tim Geithner expects foreign financial institutions to become unpaid spies of the US government. Account holders of banks who do not wish to comply will have 30% of their funds withheld if those funds are income from US sources.

It is this 30% withholding tax that has set off alarm bells across the blogosphere.

The bill goes on to aggressively expand the definition of a “US beneficiary of a foreign trust,” extend the penalty period for erroneous reporting, and expand the offshore financial account reporting requirements.

I spoke with two asset protection and tax attorneys as well as a handful of CPAs about this bill, and I plan on interviewing a few of them soon to shed some light on the new law… in the meantime, though, here’s what you need to know:

All of these measures are a major step in the wrong direction and indicative of the federal government’s assault on economic freedom. To be clear, though, these measures are NOT capital controls, nor do they make it illegal for US citizens to open a foreign bank account.

Remember, capital controls are laws that prevent the free flow of capital in and out of a particular currency, either through international bank transfers, purchase of gold and hard assets, or conversion into a foreign currency.

For centuries, capital controls have been extremely popular tools of government; in fact, they were used around the world as recently as the 1970s and 1980s. Today, capital controls are still in effect in many countries such as Cuba where locals are forbidden to hold foreign currencies.

Capital controls give the government authoritative, sweeping economic powers, providing for total control over the currency and regulation of inflows and outflows. This benefits corrupt, overspending governments by trapping wealth within a nation’s borders and enslaving capital to further taxation and inflation.

Given the dire financial straits of most governments, I’m convinced that capital controls will once again be imposed in the western world and United States some day soon. But today is not that day.

Clearly, this new law is the strongest evidence of things to come. But the window of opportunity to do something is still open. The 30% withholding tax does not make it illegal to hold funds overseas, but rather it is an administrative penalty to ensure the flow of tax information.

You can be sure that more invasive measures are coming soon… so the time to heed the warning signs is now. Besides, when capital controls finally are passed, it will be in the exact same manner as these measures were passed– quietly. You don’t want to wake up one morning and realize that you’re too late.

The language in the bill is extremely complex… so when I publish my interview with tax attorneys and asset protection experts, we’ll discuss the bill at length, as well as some long-term solutions.

In the meantime, I strongly recommend that you read the following level-headed, plain English interpretation of the bill from Mark Nestmann’s website.

I would also strongly encourage you to check out Mark’s book, The Lifeboat Strategy, which contains some excellent strategies and solutions for dealing with the decline in personal and economic freedom.

March 24, 2010
Hong Kong, SAR

One of the worst things that can happen to a country is to experience a brain-drain.  The loss of productive people who create new technologies and companies means the loss of the jobs and wealth that they create.

The long-term aggregate effects of this can be truly devastating, and history provides no shortage of examples.

By nature, though, people are generally creatures of habit– inert beings. They must be acted upon by a tremendous force to uproot them and get them moving… but everyone has a breaking point.

In aging superpowers, governments seem to be doing all they can to exert enough force to push people beyond their breaking points.

I have seen, from my own vantage point, a flood of new, fed up expats arriving to places like Hong Kong where the jobs and opportunities are plentiful, and they have strong incentives to be productive.

In fact, though it doesn’t have the same songs and bombastic statement as other countries who think they have the lock on ‘freedom,’ Hong Kong is one of the most economically free places in the entire world.  The level playing field ensures that everyone has a chance to succeed.

Do you remember how the world thought that Hong Kong was going to turn into yet another communist graveyard when it reverted to Chinese authority in 1997?

The exact opposite happened. Rather than force Hong Kong under its totalitarian authority, mainland China learned from the island’s success and adopted increasingly free market policies.

Hong Kong shows how far free market policies can go in transforming an entire society; 100-years ago, it was just a rock, devoid of any natural resources, and populated by largely illiterate fishermen.  Only decades later, the island had risen to prominence as a global financial center.

How did this happen? By allowing businesses to freely compete with each other for consumer dollars, and by attracting the best and brightest minds across the entire world to come and become wealthy from their hard work and ingenuity.

Essentially, this is the concept of “America” that has worked so many times in the past.

Today, Hong Kong has matured, along with the rest of Asia.   It is no longer the only free-wheeling boomtown of the “wild, wild east,” and the island now finds itself competing for financial primacy with the likes of Singapore, Tokyo, Shanghai, and even Labuan.

This competition is good, though, and I think it’s a sign of things to come.

Smaller jurisdictions, particularly those which lack cash cow natural resources, will continue to compete with each other to attract the most productive people through ultra-low taxes, residency/citizenship incentives, and top quality standard of living.

The theme is simple– “If you are bright and motivated, we want you to live here; and, because your ideas and hard work will make this a better place for everyone, we’ll let you keep most of what you earn and enjoy the fruits of your success.”

In aging superpowers, it goes something like this– “If you are bright and motivated, we expect you to provide for everyone else. You should be happy to do this because it is your patriotic duty, in our sole opinion. There will be consequences if you fail to comply.”

Large, debt-ridden nations will likely continue down their path of self-destruction.  I fully expect smaller countries, however, to choose a different direction and join the competition to attract the intellectual and financial capital of productive people.

This is good news for the productive who will find that they have increasing options for residence, better lifestyle, and the accumulation of wealth.

I’m seeing the signs of this already– for example, there is a very interesting new business and employment incentive program in Chile that I’ll be discussing soon, and a variety of new measures to boost entrepreneurship in countries as diverse as Guatemala, Cambodia, and Lithuania.

In the meantime, if you find yourself in the ‘fed up’ category, I’d strongly encourage you to look in places like Hong Kong for new beginnings… obtaining residency is a straightforward process, and within the island’s strong economy is a multitude of jobs and business opportunities

March 10, 2010
Pattaya, Thailand

Yesterday I apparently declared a premature end to major combat operations against the virus that has invaded my body.  Maybe it was just the celebratory Mexican food I ate last night to commemorate the end of my 4-day sickness, but I now seem to be experiencing my own W-shaped recovery.

Always the optimist, though, I’m actually grateful for a few things; namely, I’ve been too consumed with the rugby match being played inside my cranium to pay much attention to the most recent socialist musings of European leaders– something that would ordinarily have me spitting fire at the magnitude of their arrogance.

Most glaringly, Greek Prime Minister George Papandreou has been on a bicontinental tour seeking political support to eliminate some forms of derivatives trading… all with the goal of preventing “unprincipled speculators” from making money by betting on a Greek default.

Rather than misdirecting his criticism at speculators, though, Papandreou should look no further than the nearest mirror to levy criticism.  As a legendary Greek political family, three different Papandreous have spent a combined 10-years as Prime Minister, so there has been ample opportunity to get spending under control.

To lay blame at “unprincipled speculators” as a chief cause of the Greek crisis is thus completely ignorant and hypocritical.  Not to mention, Papandreou should be courting speculators to buy his country’s debt, not vilifying them.

His biggest ally in Europe right now is German Chancellor Angela Merkel. As head of the continent’s largest economy, she is completely on board with the idea of banning credit default swaps (CDS) for the sake of speculation.

A CDS contract for sovereign debt is a bit like an insurance policy designed to protect the downside risk of a bondholder in case the country defaults. As you could imagine, the price of the CDS contract rises and falls based on the creditworthiness of the bond issuer.

As an example, an investor who owns a lot of Greek debt may want to enter into a CDS contract so that he will receive a payout if Greece defaults. As part of the deal he makes payments (like an insurance premium) to the CDS counterparty… who is… guess what? A speculator!

Without speculation, there would be no counterparty on the other end of the deal, and without these credit default swap insurance policies, no one would be willing to buy Greek debt because the risk would be too high.

Meanwhile, in the opposite corner of Europe, UK Prime Minister Gordon Brown gave a rather frantic speech today as he struggles to stay relevant in the upcoming election.

For the duration of his remarks, Brown defended his response to the financial crisis, indicating that the borrowing and printing of unprecedented volumes of money were the only sensible things to do given the situation, and insisting that he is the right man to lead his country through the recovery.

When you look at the data, though, despite all the money he has been borrowing, printing, and spending, it doesn’t seem to be doing the UK economy much good.

Ah, nevermind those “conflicting statistics,” Brown said. And as for the UK’s AAA credit rating, which is under serious scrutiny due to the country’s significant debt and deficit, Brown insists that his country will not be downgraded.

How does he know? Apparently his gut told him. Or maybe his cat. Because he sure as hell didn’t ask Fitch, one of the groups responsible for the UK’s ratings.

Ironically, Fitch’s head of sovereign ratings recently said: “Britain had seen the most rapid rise in the ratio of public debt to gross domestic product (GDP) of any AAA-rated country. . . Why the UK thinks it has more time than other countries [before being downgraded], we’re not sure.”

Like most career politicians, Brown is completely clueless, yet concerned only about being reelected.  This is truly sickening, but unfortunately all too common.

So what are the investment implications of Gordon Brown continuing to ravage his economy, and Merkel handicapping European market liquidity?

For starters, I believe this will result in capital flight.  Of the major currencies in the world that can actually absorb huge capital flows, the dollar is, believe it or not, the least ugly one at the moment, so there will likely be some continued dollar strength against the pound and euro.

Not to mention, a stronger dollar would be most welcome by Europe’s exporters.

As the dollar is, however, fundamentally weak, I would expect the European currencies to post an even larger decline against the strongest Asia-Pacific currencies, as well as precious metals (a position I first recommended in December).

Lastly, I don’t think that any of this news is good news for European equities, and I personally plan on taking a large short position in those markets with some protective options.

To be clear, I will make a lot of money on these investments if Europe continues down this path of destruction… and I suppose that makes me an “unprincipled speculator” too.

February 19, 2010
Bangkok, Thailand

I really need to start out today’s letter by expressing how truly humbled I am to be part of such a fantastic community.

Matt and I have spent much of the last few days combing through resumes (200+ so far) for the job openings that I posted on Monday, and the caliber of talent and energy is really impressive.

Applicants vary in age from 17 to 70. They come from all stations of life– corporate executive, successful entrepreneur, student, homemaker; and they  hail from at least 18 different countries, from Guyana to China to the Netherlands to South Africa.

I’ve read every email with great interest and have made difficult choices to narrow down the pool of candidates. If you submitted an email, you might just be hearing from me in the next week or two.

Now… on to this week’s questions.

Karl asks: “Simon, we own a condo in Pattaya, Thailand and a home in Boquete, Panama so your comments have real meaning for us.  I am having trouble trying to decide how the decline in the US dollar will affect Panama which uses the US dollar for everyday commerce.  Can you comment on this?”

This is a great question. There are a couple of important factors that you should understand about the US dollar–

First, it’s like what Churchill said about democracy: the dollar is the worst of all major fiat currencies… except for all the others. Only three currencies can handle the massive capital flows of the global financial system without a major impact, and the other two (euro, yen) are in even worse shape.

Second, in the event of a critical dollar collapse, the currency of a country will be less relevant than its net exposure to the United States.

Panama has independent means of supporting itself thanks to the Canal, a robust financial system, global tourism, etc. So in the event of a dollar collapse, asset prices in Panama will definitely rise relative to the decline of the US dollar.

Sure, you might be paying $20 for a loaf of bread in nominal prices, but the inflation-adjusted standard of living should remain fairly stable because the Panamanian economy will still have independent income to support itself.

This is a similar fate as a country like Saudi Arabia whose ‘riyal’ currency is pegged to the dollar. Like Panama, Saudi has an independent source of income. If the dollar collapses, oil prices will spike, and the long-term inflation-adjusted effect for Saudi will not be too severe.

Contrast this with El Salvador which has no independent means of income and relies heavily on the United States for both remittance income and roughly half of its exports… Thus, El Salvador is much more vulnerable to fluctuations in the dollar.

The last thing you need to understand about a dollar collapse is that no country will be totally immune. The greenback defines the global financial system right now, and its collapse will cause panic and shockwaves around the world, at least in the short-term.

While yes, it would be preferable for Panama to have its own independent currency backed by gold, I would not let Panama’s dollarized economy scare you away.

Roger asks: “Simon, you’ve provided useful information on which countries are the safest to store gold.  Unless I missed it, however, I did not see any suggestions on places to buy gold coins in Singapore or Austria.”

In both countries, you can buy gold at nearly every bank you walk into. Austrian banks sell coins called the ‘Philharmonic’, which is the Austrian equivalent of the Eagle and Maple Leaf. Singapore banks have a wide inventory.

In Singapore, though, precious metals purchases are subject to the GST tax at 7%… which is a bummer. So one of the best things you can do there is open a precious metals bank account (try United Overseas Bank) where the value is denominated in grams instead of dollars.

You can withdraw gold in this way and the transactions are not subject to the tax.

Maria asks: “Dear Simon, It’s easy to forget sometimes that you put valuable information out every day for free on your own dime… so, thank you for all that you do. I’m wondering if you could shed some light on your sustainable community idea in Panama?”

Thanks, that’s a really nice thing to say.

Matt and I are leaning towards doing the sustainable development in Panama. I will circulate an initial concept paper in the next few weeks and put together a special list of prospective residents.

Based on my back-of-the-envelope calculations, I’m thinking that we could offer reasonably sized lots in the range of $25,000 to $50,000 in a secluded community that has its own satellite internet, clean water system, a bit of renewable energy, and a lot of low-maintenance agriculture.

Each lot would have a share of the crop yields, which I envision selling on the open market to generate a dividend for residents in the first few years, at least unless/until things really start to go south.

Also, for the planning and development, I would like to put together a steering committee comprised of experts in areas like security, construction management, organic agriculture, energy independence, etc. to help make it the best community possible.

More to follow on this in the future. Have a fantastic weekend, and get ready for second citizenship and residency discussions next week.

February 17, 2010
Bangkok, Thailand

I couldn’t believe what I was hearing… and I found myself wondering out loud- “Are these people insane??”

Apparently, yes.

I was watching Richard Edelman this morning on Bloomberg Television discussing the latest results of his research and PR firm’s annual “trust survey.”  Edelman takes a scientific poll each year, drawing on a global pool of educated, well-informed people from G20 nations.

The theme is always the same– trust.  Edelman’s research gives an indication of the public’s confidence in the private sector, the banking industry, NGOs, the mainstream media, and of course, the government.

For example, I wasn’t surprised to hear that public trust had fallen for corporations and the financial sector since last year. Edelman’s data suggest that people are more leery of business than in the aftermath of the Enron scandal, and only 29% of respondents trust what a CEO says about his/her company.

Given what has happened with the Goldman/AIG sweetheart deals, the Toyota recall, the socialization of Chrysler and GM, etc., this sentiment is to be expected.

What was shocking to me, though, was that the US public’s trust in their government and political leaders actually increased from last year– 46% of Americans trust in their government to do the right thing, which is more than the French (43%), German (46%), British (38%) and Russian (38%) believe.

What’s more, Americans’ trust in their government increased by over half of 2009’s level– a 53% increase, proportionally, from last year.  Who were they interviewing?? Barack Obama’s kindergarten teacher? The guy who owns a warehouse full of “Real Change We Can Believe In” bumper stickers?

Among major nations, only the Chinese at 74% had more confidence in their government.

Economically, 65% of respondents worldwide, including 61% in the United States, said that they want governments to *increase* control over all industries, and fewer than half of the Americans polled believe that the free market should be allowed to operate without significant government influence.

These indications are really unfortunate, because when the people ask for more government control, they will absolutely get what they deserve.  And once power has been vested to the government by the people, it almost takes a revolution to wrestle it back.

If you’re one of the minority who can properly identify runaway governments as the problem and not the solution, you should really think hard about your options.

Expatriation is often too radical a concept for most people, especially those who find themselves chained to geography by factors like job, money, and family.

Personally I would argue that family is one of the chief reasons to expatriate, and that most people would have more financial success and live a better, cleaner lifestyle overseas.

If fear and uncertainty are preventing you from making a move, I would advise that you at least get your feet wet by internationalizing yourself in baby steps.

For example, definitely consider purchasing foreign property as a first step– buying property is definitely the best way to move money between countries.  It also makes for a great investment, provides you with an emergency landing pad, and frankly gives you a reason to travel from time to time.

Do your research and buy in a free country that has a stable economy and fiscal discipline.

Panama is an excellent example– the country’s debt level is currently a manageable 45% of GDP, and the government is astutely borrowing a bit of very cheap money to make lucrative infrastructure investments that will yield a soundly positive ROI.

Furthermore, as the country continues to experience a solid growth rate and manage its debt levels, Panama’s proportion of external debt to GDP should continue to decline in the foreseeable future.

In fact, Panama is one of just a handful of countries that experienced positive GDP growth last year, and you can see evidence of this on the ground. There are currently some attractive investment opportunities in the property market, as well as fairly straightforward bank financing available.

I promised a few weeks ago to bring you some inside information about Panama’s property market, and I intend on doing that tomorrow. More to follow.

February 16, 2010
Bangkok, Thailand

The popular press has been bandying a lot of cute acronyms for the ’sick’ European countries. I have seen PIIGS, STUPIDs, and DUHs… and while the individual circumstances of each country are different, they all have one thing in common–

Their obligations far exceed their assets, and they have to borrow money just to pay interest on the money that they’ve already borrowed.

We don’t need a new acronym because there’s already a word for it: junkie. Before too long, the entire euro zone may be heading in this direction… in fact, while the final nail may be a long way off, markets are clearly starting to build a coffin for the euro.

To give credit where credit is due, I believe that Doug Casey and Jim Rogers were among the first well-known figures to declare the euro ‘doomed’ from its inception.

Their idea, long dismissed as a delusional paranoia for the better part of a decade, is now cascading through financial markets as a distinct possibility.

I came to my own conclusions a few years ago when I was traveling through Europe looking for cheap property; I didn’t find any. European costs are much higher than most of the world, and one of the chief reasons is that the governments tax everyone and everything to death.

Yet, despite the high taxes, most European governments were still run budget deficits to pay for legions of useless, omnipresent government workers and social welfare program.

I remember the day very clearly when I came to this realization– I was sitting on a train bound for Giulianova on the Adriatic coast with a gorgeous Italian girl, and the newspaper headline she was reading said “Italy’s budget deficit to exceed the EU limit of 3% of GDP”

That was in 2004 when times were good. I remember thinking to myself, ‘How are these people going to make it during a down cycle when they can’t get their act together during the up cycle?’

More importantly, since European tax rates are among the highest in the world, and the individual governments of the eurozone cannot simply print more money at will, the only way out of a fiscal pinch is to borrow.

It seems so strange that Italy, which collects 43.4% of GDP in tax revenue, can’t figure out a way to make ends meet… and because it cannot realistically squeeze out too much more tax revenue, the government must borrow compulsively.

Italy’s debt level is now well-over 100% of GDP, and investors are rightfully worried.  Given the even more dire situation in Greece, markets are now finally starting to question the legitimacy of the common currency euro zone.

Like all fiat currencies, the euro is fundamentally toxic. It is in a unique situation, though. Unlike the US, European governments don’t have room to raise taxes because their taxes are already so high. What’s more, they have many more social welfare programs and lack the political will to cut them.

That makes Europe first in line for judgment day.

The junkie countries like Greece and Italy will be the catalyst– they refuse to cut their budgets with any serious meaning, and are thus unable to raise any more debt capital from the markets.

That only leaves the prospect of a bailout from Europe’s stronger nations… except that even Germany and France cannot withstand the brunt of multiple bailouts. Obviously, if Greece is bailed out, Spain, Italy, etc. will line up with hat in hand as well.

And while the Greeks may be holding mass demonstrations to protest budget cuts, what will happen when the French start rioting in the streets to protest Greek bailouts?

European financial solidarity cannot stand, and there is no long-term solution except for a breakup of the eurozone. For now, the politically expedient answer is the current dog and pony show– bureaucrats gripping hands in a charade that is long on theatrics, short on substance.

Eventually, though, and it will have to be soon, something has to give. Greece is going to run out of money in a few weeks… so it’s either bailout or default. Neither will be pretty for the euro in the medium term.

The euro may rise briefly if Germany and the ECB signal a bailout, but the long-term implications of the moral hazard will be detrimental for the single currency.

One way to invest is to short the euro against gold and silver (XAUEUR and XAGEUR); I recommended this trade two months ago, and each has returned about 8% so far. I expect precious metals to keep rising against the euro, and to hold their value even if the world resuffers another deflationary cycle.

Another implication to consider is the effect on the Swiss franc; the Swiss do not want their currency to appreciate too much against the euro, and the government there has a history of intervening when necessary, so it may be worth opening a short position on the franc in the next few weeks.

Lastly, the implications for the US dollar and yen are significant. Until the global financial system agrees on another safe haven that can absorb massive capital inflows, the dollar and yen should see continued appreciation against the euro until the market’s anti-euro fever has bottomed out.

More on this in future letters. Happy investing.

February 5, 2010
Mexico City, Mexico

Greetings once again from Mexico; I’m sure many who listen to the mainstream press would be amazed to find that I have spent 48 hours on the ground here with nary a swine flu infection nor simple mugging to report.

I did, however, miss my flight to Canada.

What can I say… Mexico City traffic has got to be the most dangerous thing in this country. I was able to change my plans and will be in Vancouver this evening.

Before I get started on answering your questions from the mailbag, I wanted to mention a brief administrative note– if you ever have difficulties opening or reading the daily email in your inbox, you can always read it online at www.SovereignMan.com; in the meantime, my staff is working on resolving all readability issues.

Moving on to questions.

To start off, John asks: “Hi Simon- you don’t talk about politics much, though I have a feeling where you stand by reading your letter each day. Can you give me a better idea of how you see the world, politically?”

First and foremost, I want to make an important distinction. I am an avowed anarchist. Just the word itself has an incredibly negative connotation– it conjures images of subversion, treachery, and treason… or at least crazy guys hoarding guns in Montana.

People too often confuse ‘anarchy’ with ‘chaos’, usually citing examples like “if there were no laws, what would keep people from driving on the wrong side of the road?” or “who would come and put out the fire when your house is burning?”

These arguments are weak and only serve to indicate the extent to which governments have brainwashed people. Most citizens now believe that the political establishment is vital for their own survival, as if we would all spontaneously combust were it not for the FDA.

Anarchy is not chaos. The political establishment is chaos. Politicians have a horrific track record managing wars, finances, education, health care, and just about everything else they put their hands on… all at the expense of public resources.  Very little changes for the better, at least thanks to the government.

And yet, every few years, we still put on a charade to cast our vote, as if this ridiculous exercise has any meaning whatsoever. It’s an unpopular thing to say, but participating in the political process is a complete waste of time… particularly since we have a much more powerful voice.

The most important votes we cast are as consumers, not constituents… we vote with our dollars every single day. The best candidates, i.e. the producers, win our votes, and the worst candidates go bust. No amount of baby-kissing can save a defunct company.

Hell, not even a government bailout could keep Chrysler and GM alive.

Personally, I would prefer to have all of my tax dollars back in my pocket and pay a usage fee for privatized roads, or an annual subscription for a privatized library, rather than have some bureaucrat funding pet projects with my hard-earned money.

I recognize that this is all just a pipe dream, at least for now. Political institutions are here to stay, and the trend is bigger government, not more limited governments.

That’s one of the reasons why I have chosen this lifestyle– with a multiple flags approach, I minimize the impact that any single government has on my life.

Betty sends along the following comment: “You wrote that hospitals in Boquete, Panama were substandard. You are badly misinformed. Hospital Chiriqui is a modern hospital with excellent doctors who speak English for the most part; I should know, I was in intensive care there for three weeks and had five specialists attend to me.”

Noted, Betty. Thanks.

Captain asks, “Simon, do any ex-US real estate markets employ US-style mortgages?”

Yes. Panama is one of them; foreigners can get a 50% to 70% mortgage, and a better rate if you become a resident. Many European countries also underwrite mortgages for foreigners.

The other thing to consider is developer financing instead of bank financing. This tactic is being used in a lot of places around the world to mop up extra inventory. I see this everywhere now– Spain, Thailand, Morocco, and here in Mexico.

Standard packages generally require 10% to 30% down, and will finance the balance on a 30-year amortization schedule for a 5-year term.

Nathan asks: “Simon- Regarding China, I know a lot of people have been high on the country for some time. But what is the real analysis here?”

To be clear, I am not a blind China bull… but I’m happy to call a spade a spade. The ‘good’ part of the analysis is fairly simple. In the long run, there are two things needed for sustained economic growth: technology and savings.

Technology makes production (i.e. wealth generation) more efficient, and a large pool of savings becomes investment capital to create businesses, build factories, etc… things that add value to an economy.

China has both, and so the foundation for its economic growth is sound. However, there are a LOT of potential problems with China– the economy succeeds despite its government, and I’m concerned about future political instability.

Furthermore, I expect one day that China will go through significant challenges as it finds that it can no longer compete with its neighbors for low-skill manufacturing. The country will have to develop entirely new industries, and that could be painful.

Lastly, the Chinese are become cultural consumers… shop-a-holics really. This consumption depletes the pool of savings, and if sustained, will create long term structural issues.

That’s all for today, I’m off to Vancouver.  Have a great weekend.

January 19, 2010
Mexico City (DF), Mexico

For such a pale skinned gringo, his Spanish was impeccable. We were both sitting in the business class lounge at the airport, and the fluidity with which he was prattling away in Spanish on his mobile phone caught my attention.

Ordinarily, given his very light complexion and European fashion sense, I would have guessed that he was Argentine; his accent, however, was devoid of the traditional telltale Argentine indicators– the “sh” and “zh” sounds, use of the ‘vos’ for the second person, etc.

I was a bit puzzled and had plenty of time to kill thanks to an incomprehensible flight delay, so when he finished his conversation, I asked him (in Spanish) where he was from.

“I’m originally from Britain, ‘mate.” He must have noticed my surprise at hearing the Queen’s English, so he followed that up with “but I’ve been living in Caracas for over 20-years.”

Needless to say, this sparked a lengthy conversation between us about the politics of Hugo, the real situation on the ground in Venezuela, and what he’s doing to protect himself. I’ll call him Baldwin.

First, a bit of background is required– it’s important to know where a person is coming from to get a better understanding of his decisions.

In Baldwin’s case, he is an engineer by training and had originally come to Venezuela in the late 80s to help design and build a new manufacturing facility for a large European company. He spent a few years on the ground, and when an opportunity came up to start his own firm, he jumped all over it.

For the past two decades, Baldwin has built up a Latin America focused construction and design firm that specializes in working with western firms who have unique design challenges– clean manufacturing rooms, hazardous material, etc.

His business, based in Caracas, has been successful. He still lives in the city with his beautiful Venezuelan wife, and they have several children and grandchildren.

The family, he quipped, is his anchor… his reason for staying in Caracas despite Hugo Chavez’s daily plundering.

By Baldwin’s description, Chavez seems bent on turning Venezuela into Cuba– absolutely everything larger than a bicycle and more profitable than a lemonade stand owned or controlled by the government.

Before Chavez, Baldwin described Caracas as near paradise, even despite the occasional political uprising or economic instability.

“In the early 90s,” he said, “the instability was at least predictable… you could plan for it. Today, nobody knows what this guy [Chavez] is going to do next… least of all him. A few years ago I became afraid for my business.”

So what does a successful British-born entrepreneur living in rapidly decline socialist empire do?

The first thing he did the second that Chavez came to power was move his money out of the country… and it was a great move, because a short time later the government imposed severe exchange controls.

Today, Baldwin maintains a small emergency cash hoard of dollars and gold coins, plus enough money in the local banks to pay the bills each month.

Because he is an expatriate Brit and doesn’t need to worry about paying taxes to the Queen, he planted a few banking flags in Switzerland and Chile, and generally denominates his accounts in US dollars.

Yes, he realizes that the dollar has been on a terrible slide, but it’s the hard currency of choice in Venezuela.

In the early 2000s, after the failed CIA-instigated coup against Chavez, Baldwin began aggressively expanding his business and opened a satellite office in Chile. This office serves as his business’s escape hatch, so that if the worst should occur in Caracas, he will seamlessly be able to move to Chile.

Structurally, his business is registered in Venezuela… this is less than ideal for him– he would prefer to have a Panamanian company conducting business in Venezuela, but Chavez makes it very difficult for foreign companies to do business there without a local enterprise.

Personally, he maintains his postal and email addresses in Switzerland. For any physical mail, the company will scan and email, or forward upon request, every item that he receives.

He and his wife also own a personal escape hatch on the Spanish coast where they intend to go, and bring the family, if things become much worse in Caracas.

“What’s your breaking point?” I said, “What would make you hit the eject button?”

Without hesitation he replied, “With a physical invasion of my home by the government, we’d be on the next flight. I know, we should probably leave before that even happens, but like I said, my extended family is my anchor… so I’m putting up with it all for now.”

Baldwin was certainly an interesting person, and I think his example illustrates two important points– timing is critical, as is preparedness.

He moved his money out of the country at the first sign of trouble, and thus he was able to safeguard his wealth. And with escape hatches for both his business and family, he is secure knowing that his life and livelihood are not under the control of a socialist dictator.

It was an interesting weekend, to say the least, and what I am about to tell you is a true story.

I ‘intended’ to drive down to Gibraltar this weekend, hop a ferry for Morocco, and spend a few days in Africa. As it happened though, once the famous Rock of Gibraltar emerged in the horizon, I inadvertently turned my car north into the Sierra Bermeja mountains.

Down on the coast where I am living, and on the highway where I took the wrong turn, the weather is a sunny 20 Celsius (68 F). Within 30 minutes, at an altitude of 5,000 feet, I found myself driving through the worst blizzard I had ever seen. I was only about 60 kilometers from where I started and yet I might as well have been on another planet.

Moreover, I was totally unprepared. The port in Gibraltar is an hour’s drive from my home, so my quarter-tank of gas seemed sufficient for the journey… and as I had planned on sunny North Africa, I was wearing very light clothes. My companion, a young brunette, was wearing a skirt with heels.

With just one wrong turn, though, we were leisurely winding up the mountain… at first, the breathtaking scenery was so enjoyable that we didn’t mind being lost, so I decided against turning back… of course, I had no idea what powerful storm awaited me.

At one point I looked on the side of the road and remarked incredulously, “is that SNOW?” You should understand that, by nature, I am a warm-weather person… so unless I’m on skis or roasting marshmallows, the very sight of snow and ice is a net negative in my book.

Soon the warning signs became even more apparent… signs for black ice, emergency vehicles, and entire convoys of travelers pulled over on the side of the road.  Conditions became worse and worse as we ascended the mountain, and before I knew it, we were in essentially zero-visibility with high wind shears and flurries of snow and ice.

I was angry at myself for being so stupid– I had completely ignored the warning signs back when conditions were still safe.  I had seen with my own eyes the snow on the shoulder, patches of ice on the road… did I honestly think that things would get better the further up the mountain I drove?

No. I ignored the warning signs and I hadn’t made a single preparation for the hazards; my gas light was buzzing, and I had no means of food, water, or warmth.

I consider myself to be a tough hombre, but I’m back on my terrace right now penning this letter out of pure, dumb luck, and nothing else. I was fortunate enough to find an open service station that provided food, fuel, and useful directions.

I realized later that my experiences this weekend serve as an allegory to what is happening in the world right now… there is a fantastic storm awaiting the unprepared, and it is just a few more kilometers ahead up the mountain.

While some travelers have turned around and headed back towards the coast, and others are stocking up on provisions, too many people remain completely oblivious to the very clear warning signs of the danger ahead.

My goal is not to induce any unnecessary excitement… but rather to simply promote some basic sensibility. It seems to be a part of human nature to ignore warning signs and wait until it is too late to take action– whether it be with our health, romantic relationships, finances, or even our livelihood.

I hope I can serve as that little voice in your ear, reminding you to do the things you know that you should do.

For example, if you have savings, it’s time to move them, either to a foreign bank or private vault facility. If you own a business, think about restructuring overseas and exploring new markets. If you have the means, consider foreign property and second citizenship. If you don’t, it’s time to seek new opportunities to generate wealth.

Tomorrow I will start a series on overseas business structures, including the real truth about tax implications and benefits for entrepreneurs. If you own a business, you won’t want to miss it.

In the meantime, I really recommend that everyone check out this month’s Casey Report, which was a special edition on expatriation.

Doug Casey, who is my friend and mentor, wrote what I consider to be among the finest pieces of his 30+ year career.  As a veteran permanent traveler and longtime international speculator, Doug’s words are based on hard experience:

“A crisis (and this will be a very real one) always draws exhortations from the authorities to ‘unite’ and ‘pull together’ ­- which usually boils down to following orders and turning in those who don’t. People will want, and will get, ’strong leadership.’ This does not bode well for libertarians, classical liberals, and free thinkers, in general. . . I suggest you at least consider the possibility of transplanting yourself, or at least start by transplanting some assets. Don’t look at it as a negative thing. The world is your oyster. Make the most of it.”

Doug goes on to make a lot of specific recommendations about regions of the world that he likes / doesn’t like, and following his article is a great overview on financial expatriation options like foreign annuities and mutual funds.

If you’re not currently a subscriber to the Casey Report, you can find out more here.

If I have been too subtle in the past, let me be absolutely clear this afternoon: the time to do something, the time to take action to safeguard your future and your families livelihood, is NOW.

I’m more impassioned than usual this morning… and with reason.  Reluctantly, I tuned in to Team Obama’s press briefing last night about the ongoing saga of the Nigerian underwear bomber.  Obama’s is clearly trying to cultivate a fear of al-qaeda while simultaneously building blind trust in his government.

After the President’s remarks, his Homeland Security Secretary and Deputy National Security Advisor took the stage to unveil a series of proposals to ‘improve security.’

I’ll spare you the details as you have probably already heard them, but the bottom line is simply more government– a bureaucrat’s ultimate and only solution. This means more TSA, more air marshals, more undercover agents, more gun-toting soldiers, more pat-downs, more scanners, more searches, more scrutiny, more suspicion, etc.

How do you spell police state?

I’m ordinarily laid back about this sort of thing. I can afford to be since I’m a safe distance from all of that stupidity… but in this case I looked down to find that my knuckles were turning white, clenched around my glass of 2005 priorato.

I set my wine down and remarked to my friends who were watching with me, “What is it going to take for people to wake up and get the hell out of town? Do they need legions of storm troopers marching down the street before they realize it’s time to go??”

I was positively exacerbated.  The US is turning into a police state, and I’m not even saying this specifically to Americans living there. Many countries around the world are following close order behind Uncle Sam.

Once again, the time to act is now.  So what should you do?

First, make sure you have access to funds outside of your home country. This is one of the most important flags that you can plant.  You should open a foreign bank account (like I discussed in the Panama Black Paper), and/or consider storing precious metals in a private storage facility overseas.

Later this quarter, I plan on releasing a new Black Paper that contains actionable information to open an account at safe foreign banks that still take US customers.  You haven’t heard of most of them, and would probably never hear about them because it’s actually illegal for foreign bank to advertise in the United States in most cases.

Stay tuned for that.

Second, you should really be thinking hard about foreign property. Why? Because it can be a great investment; it’s an easy, non-reportable way to move money overseas; and it can be your escape hatch when you’re finally ready to hit the eject button.

Remember, I’m not talking about a 50 million euro villa in Monaco; you can pick up cheap land in Latin America for less than $50 per acre, and I’m pretty sure that everyone reading this letter has at least 50 bucks to spare.

Also, as I’ve discussed in the past, you can buy foreign property using your tax-deferred retirement savings, and I plan on revisiting this topic in short order because it is an absolute no-brainer.

Additionally, if there’s interest, I may also explore the idea of building a small, cost-effective, subscribers-only development.  It would likely be on the outskirts of Panama City and include self-sustaining fresh water and agricultural resources.

Third, if you have the means, you should really consider obtaining second (or third, fourth, etc.) citizenship. Second citizenship can be the ultimate emergency exit if things get really bad, and it effectively serves as the most comprehensive insurance policy you could even have.

I have a lot of contacts in this field, and my colleagues and I are currently experimenting with a few options that I plan on bringing to you soon.  I won’t bring you a passport program unless one of us has gone through the process ourselves, so give me some time while we play guinea pig.

Fourth, give serious consideration to your finances; unless you are already independently wealthy or have sustainable income streams, think about what you would do to earn money if you lost your job today.

Think about what skills you have– what problems can you solve that other people are willing to pay you for? What opportunities to you see around you that can be quickly and profitably exploited?

I guarantee you that there is opportunity everywhere around you. For example, a friend of mine is an intelligent, 22-year old girl who lives in Minsk, Belarus– the last bastion of the Iron Curtain.  While Belarus is not the totalitarian state it once was under the Soviet Empire, it’s pretty close.

And yet, despite living under a tyrannical yolk, my friend has become quite a successful entrepreneur, launching a successful brick-and-mortar company and several profitable web sites just within the last few months.

I raise this simply to point out that if an inexperienced but intelligent and energetic young girl can find opportunity in a place like Belarus, then I would wager that there is a plethora of opportunity out there in places like Panama, Abu Dhabi, Chile, China, Angola, Thailand, Bulgaria, and even the US/Europe.

In fact, I know this to be true because I see so much of this opportunity when I travel.

So those are the top four things I would recommend you do in making your own personal preparations. I clearly have a lot of work to do between the real estate, the citizenship programs, and the banking Black Paper… but after seeing the writing on the wall so plainly last night, I will be refocusing my efforts to get these moving quickly for you.

In the meantime, let me know your thoughts– I’m frankly curious to know what you would like to see in a real estate development, and at what, if anything, it would take for you to hit the eject button.

January 5, 2010

Reporting from: Estepona, Spain

I’ve spent a lot of time lately sitting on the terrace of my coastal villa here in southern Spain, enjoying great conversations with friends, pondering the markets, and making significant investment and business decisions.

I’ve found that it’s much easier to do this in a peaceful environment, free of the normal distractions that can invade our daily lives.

In fact, one of the key benefits of living a multiple flags lifestyle overseas is building up a wall against these distractions.  As I travel, I become markedly out of touch with the sensationalized minutia that pervades national headlines back at home, whether it’s Tiger Woods, Obama’s vacation, or the Nigerian underwear bomber.

Occassionally I flip through the cable news channels and spend a few minutes chuckling at their ‘in-depth’ coverage of the White House party crashers.  Since I am safely outside the system, it feels like I am visiting the local zoo, peering in to the monkey’s cage and observing a strange mating ritual.

“How bizarre,” I think to myself, shake my head, and then go on with my life in the real world.

One such series of events that has really made me shake my head is all the new attention to airport security in the United States.

Americans were shocked at the incompetence of their government agencies– how could a Nigerian man on the watch list pay cash for a one-way international flight with no checked baggage and make it on board with incendiary powder in his pants after tipping off the embassy?

Frankly I’m surprised that anyone has any confidence left in the government. Can we really be that surprised?  It’s amazing that people still look to the government for a political solution to security.

The government has a dismal track record and is consistently playing catch-up, overreacting to situations after-the-fact with ridiculous policy measures.

The immediate fall-out from these recent events has been mind-numbing.  Authorities deemed that passengers would have to keep their seats for the last hour of the flight… as if an ‘evil terrorist’ who is bent on a suicide attack would be thwarted simply because a flight attendent told him to sit down.

The government’s reactionary lunacy in dealing with these situations is unparalleled.  I bring up this point, however, not to bemoan the government’s actions. We all know they are corrupt and incompetent. What amazes me is the total lack of self-reliance by the people.

In a Reuters article yesterday, for example, I read about the security breach at Newark Airport. An unidentified man apparently bypassed the security checkpoint by walking through an unguarded exitway, fuddled around the gate area for 20 minutes, then left the airport.

Newark was locked down for 6-hours while jumpy police and TSA agents rescreened thousands upon thousands of passengers, trying to overcompensate for dropping the ball.

The article goes on to further discuss how many ’security experts’ are suggesting the use of body scanners and more intimate security in order to keep Americans safe.  Then I started reading the comments.

One particular comment from user “janeycat” probably sums up the voice of quite a few Americans:

“I for one am all about pat-downs and body scanners… I don’t fly and have no    reason to but i sure don’t want a blasted plane falling out of the sky on me !!!!”

Wow. What happened to the land of the free and home of the brave? It has been replaced by the land of the mandatory bicycle helmets and home of the safety-patrol.

To me, there is so much wrong with the user’s comment, though it is best summed up by Benjamin Franklin: “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.”

In Franklin’s day, you were responsible for your own safety and your family’s safety. The government was not expected to protect you.

Today is a completely different story. We have abdicated our self-reliance and now depend entirely on the police and the government to save us from the evils of the world, real or manufactured.

Ironically, though, the government has determined that it does not actually have an obligation to protect its citizens.

In “Warren v. District of Columbia (1981),” the court ruled that “a government and its agents are under no general duty to provide public services, such as police protection, to any individual citizen.”

Many other court cases reaffirm the same point. It might not be Ben Franklin’s time anymore, but you are still completely responsible for your own safety. Anything else is simply an illusion.

I’m curious to see where you stand, let me know if you agree.

January 4, 2010

Reporting from: Malaga, Spain
Welcome back; I hope you had a relaxing holiday.

I spent 10-days with my family combing through the Italian countryside and drinking some unbelievable wine from a local grape called “Primitivo.” It’s a distant cousin of the California Zinfandel, and is only found in this region. A bottle from the best vineyard will set you back about 9 euro.

For New Year’s Eve, I saw a fireworks show that was simultaneously the most disorganized and explosive I have ever witnessed… so literally for me, the new year began with a bang.

I’m optimistic about 2010. I know a lot of people in the financial community who think that ‘this is it,’ that 2010 shall bear the worst economic cataclysm in history, causing widespread doom and agony.

Sure the conditions are ripe for stock/bond market crashes, a currency crisis, and multiple sovereign debt defaults.  But these are a far cry from a gloomy end of human civilization.

It’s not that I have tremendous faith in world ‘leaders’ (as ridiculous a moniker as that is to use); last month’s debacle in Copenhagen only further underscored how perverse and ineffective the existing political process is, and everyone is really starting to see it.

The Social Contract is deteriorating rapidly, and in the end, the one thing that you can count on is that people will ultimately do what they perceive to be in their self-interest.  This is what drives markets and trends.

As the protracted effects of government stupidity become more apparent, one such trend that I see emerging this year is the rise of the sovereign individual– the rebirth of the multiple flags approach.

I’ve talked about this before and I wanted to start off the year with a quick primer since it is a recurring theme of this letter. To be more specific, I absolutely implore you to plant multiple flags as part of your New Year resolutions.

The idea, originally conceived by international finance guru Harry Schultz, suggests diversifying different aspects of your identity across multiple ‘flags,’ or geographic jurisdictions.

As an example, Schultz coined the term ‘three-flags’ in the 1960s, suggesting that an individual should have citizenship in one country, residence in another, and businesses in another.

Later authors expanded on this idea by adding other ‘flags,’ including places to bank, places to ‘play,’ places to house electronic assets, etc.

Many writers today talk about ‘five flags’ or ’six flags,’ but frankly I don’t see a limit on the number of things we can diversify geographically: email, citizenship, residence, banking, brokerages, gold/silver deposits, business registration, e-commerce, customer base, phone/fax, financial instruments, postal mail, etc.

So what’s the point? Why should you do this?

Diversifying geographically increases your freedom, your privacy, your sovereignty, and potentially reduces your tax burden. It protects you against bank failures, market changes, litigation, divorce, overzealous governments, and “NGC’s” (non-government criminals).

Perhaps even more importantly, planting multiple flags expands your existing contact base and opens a lot of doors to new opportunities.

Think of it like a life insurance policy– even if the worst never happens, it gives you great peace of mind and in many cases can rank as a significant asset.

While everyone recognizes these benefits of life insurance, no one actually expects to die anytime soon… so they put shopping for a policy on the back burner, sometimes until it’s too late.

In this case, the time to start diversifying internationally and planting multiple flags is now… before it’s too late– before currency controls are imposed, before tax codes change, before the last remaining foreign banks close their doors to foreigners.

I could cite you examples all day long, but I will list just a few hypothetical cases–

Imagine getting sued, losing the case, and having your financial assets commandeered by the court. Now imagine if your assets were safely offshore in another country.

Imagine being investigated by the government and having your email archives turned over to the authorities. Now imagine if your email server were in another country.

Imagine being robbed (taxed) by the government because your business is structured within its jurisdiction. Now imagine if your business were registered in another country.

Imagine having everything in your home country taken from theft, coercion, and litigation. Now imagine having cash and gold locked away in a secure, private vault overseas.

Imagine the social decay in your city getting so bad that riots and violent crime are a common occurrence. Now imagine having property overseas.

I’m sure you get the idea. Putting your assets, your business, your citizenship, your residency, your family’s livelihood under one flag, one government, is putting all of your eggs in one very frail, weak basket.

Technology makes it incredibly easy to diversify, and I see more and more people waking up to that reality each day. It takes only moments to set up an offshore email account, a few minutes to lease a private vault, and just a couple of hours to set up a company in Singapore.

The possibilities are truly endless, you just need to find the right tools and the right flags that work for you. Yes, even if you are a US citizen who is taxed on worldwide income, there are still several options available to live a multiple flags lifestyle.

I will be discussing the options in future letters, as well as individual case studies.

We all know that Google is in bed with the government… I suppose it’s nice that CEO Eric Schmidt is at least open about it.

In a recent interview with CNBC, Schmidt effectively admits that Google archives everything about a user– web searches (google), email and contact lists (gmail), online office documents (google docs), photographs (picasa), text and voice messages (google voice), and even a user’s current location (google maps).

The depth of this information is a bureaucrat’s fantasy, and as Schmidt indicates, Google is obliged to hand it over.

Google is obviously very convenient; its features are powerful and can make life very easy… it’s really unfortunate, however, that they are subject to the oversight of an increasingly intrusive and corrupt government.

This is simply a choice that you as a user have to make– privacy over convenience. If you fall in the ‘nothing to hide, nothing to fear’ camp, giving the government access to your entire electronic life may be perfectly acceptable.

For the rest of us, there are great solutions that provide a lot of conveniences.

I’ve discussed electronic privacy in the past and promised to give you a list of countries that don’t snoop on phone and email conversations. You can obviously scratch off most of North America and Europe, but there are still countries that respect individuals’ privacy.

The folks at Cryptohippie were kind enough to do the heavy lifting for me, ranking 52 major countries on issues such as constitutional protection of privacy, data retention, ‘loose’ warrants, financial tracking, and likelihood of data inspection at border checkpoints.

You can download the full report here.

Although their list is definitely incomplete and needs updating, I generally agree with their rankings.  Sweden and Thailand, which have strong elements of electronic snooping, need to be moved higher up the list.

According to CryptoHippie, the top 10 electronic police states include North Korea, China, Belarus, Russia, UK, France, Germany, and of course, the United States.

From my assessment, countries that respect electronic privacy include Panama, Costa Rica, most developed Caribbean nations like the Bahamas, Brazil, the Philippines, and Switzerland.   

One email provider you may want to consider is Australia-based Fastmail. As the name suggests, the technology is incredibly fast, and contains some of the most customizable features I have ever seen. For example, you can set a ‘distress’ password that, when typed in, will lock down your email account for a defined period of time.

Best of all, while Australia is a ‘middle of the road’ electronic police state, the Fastmail founders have taken on a multiple flags approach, basing their primary and backup servers in different countries outside of Australia.

If you have your own domain for email, e.g. yourname@yourdomain.com, you can easily change your domain’s setting to point your email servers to Fastmail. You will never notice a difference in service and can rest a bit easier knowing your email archives aren’t feeding bureaucrats.

I think it’s a sharp idea for anyone who takes privacy seriously to plant an ‘electronic flag’ somewhere other than his country of residence. In terms of living a more free, multiple flag lifestyle, it’s definitely the easiest, most cost effective thing you can do.

So much for BMW’s run-flat tires. Believe it or not, I’m actually sitting on the side of the A3 motorway in central Germany, about halfway between Frankfurt and Munich, waiting for the tow-truck to arrive. 

Apparently you’re supposed to be able to drive on these tires even when they’re flat… and with such confidence in their country’s manufacturing capabilities, the German rental car company didn’t bother providing me with a spare.  Call me old-fashioned, but I’ll take a spare and a jack over run-flat tires any day.

Given what we put this car through, though, it has performed admirably– about 2,500 miles of hard driving in just 4 days at speeds usually exceeding 200 km/h.  You see a lot of interesting things when you spend that kind of time on the road, and one of my observations leads me to believe that we are in for a major shift world finance.

For starters, customs agents across Western Europe are visibly out in force, patrolling the highways and major travel hubs.  Their mission? Generate revenue, coercively if necessary.

In just a single 12-hour period, we were stopped twice in France by government thugs.  Similar to my treatment that I described last week at Helsinki airport, the encounter felt more like an inquisition– where were we driving from, what were we doing there, what do we do for a living, and most importantly, how much money were we carrying…?

They seemed disappointed and skeptical when we said “uh, about 250 euro…” as if two well-dressed gentlemen in a nice sports car were cosmically obliged to be carrying more than 10,000 euro.

They didn’t take our word for it and continued the snooping and inquisition.  If this had happened only one time, I would have written it off as an anomaly. But multiple times within a short period of time is suggestive of a broader agenda.

My business partner Matt had a similar experience before his flight from Chicago to Frankfurt just last week; as he was strolling down the jet bridge to board the plane from the business class entrance, he ran into a squad of customs agents waiting to randomly inspect passengers.

Once again, their chief concern was monetary instruments– How much cash was he carrying?

Customs officials are like feudal lords; they wield supreme power in their little border fiefdoms and have the authority to confiscate whatever they like, for any reason, and then stick you with the onus of proving your innocence.

This is exactly why the government has its people patrolling the airports and highways… low on ‘hope’ and short on ‘real change’, the government has tasked its border enforcement with grabbing as much cash as possible.  It’s sort of like setting up a speed trap in a small town with no economic prospects.

If customs officials believe the amount of money that you are carrying is for suspicious purposes, they have the authority to relieve you of your cash, Constitution be damned. The same standards apply in Europe. In a very literal sense, this amounts to highway robbery.

The standard generally applied is “presumed guilty until proven innocent,” and I think it’s safe to assume that these types of searches and seizures specific to monetary instruments will increase.  More importantly, though, these measures are likely an overture to the eventual implementation of capital controls.

Governments rely on capital controls to regulate the flow of capital through their borders.  In times of crisis begotten by political stupidity, they have an even greater need to keep money on shore to ensure that you’re paying your fair share of somebody else’s mortgage.

The first step in capital controls is to go after cash; it raises money through confiscation and makes people rely more on the banking system out of fear.  The next step is to re-regulate the banking system to make cash transactions more cumbersome and dealing with foreign financial institutions more controlled.

This is already in the works with the recently passed US House of Representatives bill H.R. 4213.

I discussed this trend towards capital controls three-months ago, but frankly I am surprised at how fast things are moving. The time to plant a financial flag overseas is now, and there are a couple of ways to do that.

First, foreign bank and brokerage accounts are a reasonable solution. I’ve mentioned this numerous times in the past, most recently with a discussion about Islamic Banking. I think that Panama, Singapore, Hong Kong, UAE, Malaysia, and Canada are all reasonable places to bank.  There are many more that I will be discussing in the future.

While there are some annual disclosures to file in some countries (like the US), it is completely legal to have a foreign bank account, and I doubt governments will ever change that… they’ll just make it next to impossible to move money.

That’s why the window of opportunity is now.

Second, buying foreign property makes a lot of sense. At present, there are no reporting requirements for foreign real estate, and as we have discussed in the past, you can even move individual retirement savings into foreign land.

More to follow on all of this. Stay tuned.

It took three speeding tickets in the south of France on the way from Monaco to Barcelona, but we made it to Spain late yesterday evening.  I had forgotten how expensive it is to drive in France. Fuel is among the most expensive in Europe thanks to a series of extraordinarily high taxes.

Gasoline, as people often forget, is a fungible commodity… in its pure form it should cost the same everywhere because it is priced by the market and traded on futures exchanges.

Aside from some variations in distribution costs, the major reason why fuel is priced differently around the world is government meddling– some governments subsidize fuel so that it’s artificially cheap (Venezuela, Dubai); others tax it to death (France, California).

It’s no secret that western European governments enforce an incredibly high tax burden on their citizens in order to pay for the ‘greater good’ of all members of society.  Taxes, as we are all aware, eventually lead to higher prices.  In this case, I’ve been actually shocked… even offended, at the prices of what I have seen in Europe.

After a series of tax increases over the last 2-years to pay for the effects of the economic slowdown, Europe has become much more expensive than I remember even six-months ago. I spend a few months on the continent each year and have a good feel for pricing; it seems to me that things are starting to get out of control.

$82.50 for two burgers and three beers; $13.50 for a fast food sandwich; $7 for a cup of coffee; $4 for a small pack of gum at a gas station. You get the idea.

Part of this pricing scheme is clearly based on recent dollar weakness. Much of the world’s institutional capital has lost confidence in the dollar simply due to the prospect of an extended period of ultra-low interest rates.

Last Friday’s jobs report gave the market a brief period of confidence in the dollar– investors believed that the US economy had reached a turning point, meaning that interest rates would rise earlier than expected.  Interest rate futures soared, and investors ran back into the dollar.

This only lasted briefly, for as soon as Comrade Bernanke opened his mouth on Monday, he assured markets that he would continue to keep interest rates artificially low. And just as quickly as they piled in to the dollar, investors went looking for the exit once again.

There are only three currencies in the world that have the ability to absorb enormous capital flows like this– the dollar, the euro, and the yen.  When investors flee the dollar and are looking to park their capital, it goes to the yen first, and then the euro. As such, there has been a steady rise in both of these currencies this year.

The price disparity that has developed between Europe and the United States, though, is enormous… and the exchange rate only tells part of the story.

In economics, the “law of one price” suggests that, everything else being equal, identical goods should be priced the same everywhere in the world– an iPod in Paris should cost the same as an iPod in New York. 

But everything else is not equal.

In Europe, merchants are plagued by higher taxes across the board– sales (VAT) taxes, payroll taxes, income taxes, excise fees, and a variety of others. All of these taxes are eventually baked into a higher price for products, and the consumer is the one who ultimately pays.

This is simply another form of inflation. Taxes push up the price of goods, employees demand commensurate wage increases, and the price of everything increases… yet there has been no real wealth created.

It is for this reason that I see two things happening;

First, the euro is due for a fall against the dollar. Yes, investors view the dollar as risky, but as the worthless ratings agencies are circling over Greece for a downgrade, investors also view the euro as risky. This reduces demand for the euro, and as there are few options available to absorb large currency flows, the dollar stands to gain.

Besides, in the long run, prices need to be similar, and that means a currency correction… leading me to point #2:

It’s not that the euro is terribly overpriced; it’s that the dollar is significantly underpriced, relative to ’stuff’.  iPods and apple pie should all cost more in the United States, and they will.  The next round of new taxes to pay for carbon, health care, etc. will cause European-style price inflation as US merchants have to increase the price of ’stuff’ to keep up with taxes.

End result? The euro falls against the dollar, and the dollar falls against ’stuff’.  You can play a euro/dollar short, but I think it would be an even better trade to short the euro against gold and silver.

More on this later.

Over the weekend in Vienna, I had the pleasure of dining with a very interesting gentleman (I’ll call him “Chris”) who is a subscriber and new inductee into the Atlas 400 club that I’ve mentioned before.

Chris travels extensively, like me, and we discussed how many countries are quickly becoming police states. In Europe, I would candidly put Finland towards the top of that unfortunate list.  My entry into Europe from Thailand last week was marked with yet another atrocious experience at Helsinki airport.

For the third time in as many trips to Finland, as soon as I set foot off the plane I was ‘greeted’ on the jetbridge by squad of armed government agents decked out in paramilitary gear and urban assault rifles. 

Their collective arrogance and overinflated sense of self-importance became quickly apparent as they gleefully combed through a random selection of passengers and their personal items.

The next round of faux-security was the passport/immigration checkpoint. In most countries, this is a routine procedure that takes little more than 30-seconds. The Finnish authorities averaged over 2-minutes per person… I counted.

It was more of an interview than an immigration checkpoint– questions like “where is your mother from,” and “how much did you earn last year?” I wondered if they were going to ask my favorite color as well. 

I jest, but the immigration officer’s demeanor and intensity suggested that he was quite literally making up his mind on the spot whether or not he would let people into his country.

Following immigration was another security screening– metal detector, x-ray, etc. In this case, though, each passenger received a wanding and full physical pat-down… I’m not talking about the usual cursory touch either– this was a full-on, ‘you have the right to remain silent’ pat-down usually reserved for violent felons.

As you could imagine, the Finnish security officials made every effort to intimidate passengers throughout the process… and it works. Most people end up developing an innate fear of their government, and in many ways, I think developing a culture of fear may be the government’s ultimate aim with these sorts of programs.

If an individual has a real reason to be fearful of his government, it’s time to relocate. On a downward slide, these issues don’t tend to get better with time, they get worse. It certainly begs the question, though, what is the right thing to do?

For people who understand the system, government security officials’ Stasi scare tactics are simply empty gestures enacted by little boys playing soldier.  They actually believe they are doing God’s work, and that their jobs aren’t as worthless and pathetic as the rest of us realize.

Furthermore, they have a chip on their shoulder.  Deep down I believe that most of these thugs got beaten up by the playground bully every day when they were kids… now armed with a government-issued firearm and a bad case of self-righteousness, they’re taking their revenge on the world.  

Consequently, they routinely push the limits of their legal authority, preying on fearful citizens who are ignorant of the law and their own rights.  Most of all, they’d love nothing more than an excuse to abuse an intellectual dissenter.

In my case, when I deal with these goons I go through an intense personal debate.  My instinct is to fight, argue, and question authority, but generally this only attracts unwanted attention and additional scrutiny.

My goal is to fly under the radar, not end up on some revolutionary watch list… so generally I comply with the procedures and take action later– in this case, I doubt I will ever fly through Finland ever again.

(If I happened to be detained for secondary screening, though, this is where the gloves come off…)

The polar opposite of the ‘compliance strategy’ would be this guy, who has become a bit famous for his opposition to Homeland Security checkpoints in the United States. “Am I being detained? Am I free to leave?”

His very visible loathing and disrespect for the DHS’s pretend authority is admirable, though in all fairness I’d like to see him pull that off at an airport.

I’m really curious what you think– what is the right thing to do? Comply, and get it over with quickly? Or dissent in the face of authority, challenging them at their own game?

I tend to shy away from politics and policy.  Sure I’ve discussed taxes, privacy, and healthcare a few times, but I don’t normally whine about government too much because (a) it’s unproductive, and (b) living a ‘multiple flag’ lifestyle means that governments have little impact on me.

Last night, though, President Obama spoke to America’s emerging military leaders at my alma mater about his ‘new’ Afghanistan policy, and I think it’s worth having a discussion with some honest, clear thinking.

Conventional wars are fought against a tangible enemy; his forces are vanquished, his resources are plundered, and his ground is seized. To the victor goes the spoils, and in the case of World War II, for example, that meant global economic dominance for the United States.

Today, though, the enemy is ‘terror’, an abstract noun.  It’s like waging war on music– there is no tangible measure of victory and no defined enemy… and after 8-years, there have been no clearly-stated objectives– What is the mission? Who, specifically, are we fighting? Why are we fighting? How do we define success in the engagement?

These are basic military principles that comprise every operational plan.  In this case, all we have heard since 2001 are generic platitudes about freedom and security, and a false premise about WMDs in Iraq.

Last night, Obama outlined some clear objectives for Afghanistan… although it remains unstated what ‘victory’ in Afghanistan has to do with security for individual Americans and the larger war on terror.

The first objective is to deny al Qaeda a safe haven in Afghanistan. That may be fine and dandy, but to expect that al Qaeda would not be able to find safe haven in Pakistan, Iran, Tajikistan, or Western China is simply nonsense.

The second objective is to reverse the Taliban’s momentum and deny it the ability to overthrow the government.  The first part is a tactical operation, and that requires the appropriate military resources.

General McChrystal, the commander in Afghanistan, requested 45,000 troops to accomplish this mission. Obama is giving him 30,000, despite saying that “our security is at stake in Afghanistan.”

This is truly mystifying– a war should either be fully fought, or not fought at all.

Fully-resourced conflicts with clearly defined objectives (World War II, Persian Gulf I) are winnable.  Political wars with unclear objectives (Korea, Vietnam, Mexico in 1846) are quagmires.

Further to this objective, denying the Taliban the ability to overthrow Afghanistan’s government is simply impossible in the long-run. The country has a long history of coups, and while the Taliban as a military force can be neutralized, its ideology, like democracy in the west, is culturally ingrained.

Democracy, by definition, cannot be force-fed.  George W. Bush believed that God’s will is for humankind to live in a democracy.  Well, there are a hell of a lot of Taliban who think that God’s will is for humankind to live in a misogynist theocracy… and you can’t settle this debate at gunpoint.

Overall, even if these objectives are accomplished and both Iraq and Afghanistan become beacons of democracy, expelling terrorist/fundamentalist aggressors from their borders, the question remains– has the US ‘won’?

No. This is impossible without clear objectives and a defined enemy.

“Terrorism,” like crime, is a general, unorganized threat. Rooting out all the criminals in town, for instance, would require a house-to-house inquisition, and a lot of innocents being thrown in jail.  Even then, you still wouldn’t catch everyone.

Similarly, there are legions of people who wish to harm the US.  It is just as impossible to eradicate this ideology as it is to expunge the criminal instinct.

At the end of the day, Americans will simply have to live with the grim reality that there will always be groups of people in the world with an intent to harm… and there always have been.

Americans were just as ‘threatened’ by terrorists 25-years ago as today, but they didn’t feel the need to engage in an endless war back then… and yet, somehow, most people managed to live through the day.

Today, though, because a bunch of knuckleheads from Saudi Arabia hijacked four airplanes (as the story goes…), the US government has spent $1 trillion to ‘protect’ Americans from men in caves.

Even if we assume away that Iraq and Afghanistan can become stable without US presence, these men in caves will not go away… thus the greater threat to US security still remains.

This effectively leaves two choices.

First, the US can continue to wage an endless global military operation, country to country, house to house, rooting out ‘terrorists’ wherever they may be deemed to exist.

The second: force Americans to live with the reality that there are bad men out there, be they criminals, terrorists, corrupt financiers, or politicians. Then, end a string of woefully poor decisions that have landed the country in an absolute mess.

That string of bad decision-making has pervaded for decades across administrations, and it applies to just about everything in government– monetary policy, education, healthcare, energy, or anything else.

The only choice is for the government to walk away from these empty ventures– bring the troops home, close down our 170+ foreign bases, shut down needless departments/agencies, repeal the income tax, end the Fed…

… which brings me back to why I rarely discuss these issues here: the list of government errors is enormous, and nothing will ever happen to fix them.

That’s why I focus on what individuals can do– look overseas, set up multiple flags, generate real wealth, consider second citizenship, take back privacy, etc.

(in this case, for example, if you’re sick of war, you can spend time in a place like Costa Rica which has no military.)

I’d like to hear your thoughts about the war and the things you’d like to hear more about; I’m always open to discussion.

Please begrudge me the quote from V for Vendetta,  but I’m really starting to worry about what’s going on in the United Kingdom.

On Wednesday I wrote about the UK’s “Interception Modernisation Programme.” New rules under the program require wireless companies and internet service providers to archive phone records, web history, and emails for a period of 12 months, and to make that data available to 600+ government agencies without a warrant.

Naturally, the erosion of privacy was absolutely shocking, and I was sickened… at least until the next day when I read an even more disturbing story, also out of the UK.

Now the British government has announced that it is going to maintain DNA profiles of innocent people for ‘only’ six years. 

You see, this is actually a shift in policy. Since being established in 1995, the government has built up it’s “National DNA Database” to over 4.7 million people, and it grows by 30,000 per month. This is about 7.6% of the population. Oh yeah, and it costs British taxpayers about $100 million/year.

How did the database get so large? The UK’s Criminal Justice Act of 2003 authorized DNA samples to be taken by police on everyone they arrest or detain… you don’t even have to be charged with a crime.

Without any consent whatsoever, police can take oral swabs, footwear impressions, fingerprints, and in some cases blood, urine, semen, and dental impressions.

Until now, the British government has maintained DNA profiles indefinitely, even for people who had been found innocent and released from police custody without ever having been charged. 

In a historic case, the European Court of Human Rights recently ruled that Britain’s policy of keeping the DNA data indefinitely was a clear violation of human rights… so on Wednesday, the British government announced that it would discard innocents’ DNA profiles after 6 years.

The great irony with both the DNA compromise and the Interception Modernisation Programme is that they were announced right around the same time that European leaders were collectively celebrating the end of communist tyranny and the secret police.

Naturally, the British government doesn’t consider keeping DNA records to be remotely totalitarian; rather, authorities maintain that the information helps the war on crime and terrorism.

According to the government’s statistics, 6,504 rape and murder crime scenes over the last 8-years have had DNA evidence matching a profile in the national database.  Apparently this is supposed to make people rest easy.

Personally, I’m left wondering about the other 4.7 million DNA profiles that weren’t involved in these crimes. I’m also left wondering how many of the 6,504 profile matches just coincidentally happened to be near the crime scene but were not involved with any criminal act…?

The scariest part is the following line I copied from the government’s website– 
“Maintaining and developing the [DNA] database is one of the government’s top priorities.”

I almost passed out when I read it.

Yes, I recognize that there are people out there who believe that, “hey, if you have nothing to hide, why are you so concerned about the government monitoring your emails or maintaining your DNA records?”

This ‘nothing to hide, nothing to fear’ argument is flawed for two key reasons.

First, it means that the individual agrees to a ‘guilty until proven innocent’ paradigm; in this case, you may have nothing to hide, but you are agreeing that the government will assume your guilt until it goes through your private affairs to prove innocence.

Second, it is the mother of slippery slopes. In a span of three days, the British government has announced its electronic surveillance program, and now an insipid response to the European Court of Human Rights for its DNA database standards.

What will it be tomorrow for the Brits– a national ID card? Oh wait, that’s in the works already.

Look, I’m an incredibly positive and optimistic person, but these clowns are really going down a dangerous path… rather than spend an entire letter decrying the British government’s complete disregard for civil liberties, however, I will leave you with a few suggestions.

If you’re looking for privacy, stick to smaller countries that would never cough up so much money for complicated DNA databases. Panama comes to mind. Croatia. The Philippines. Chile. Moldova. Tanzania. Ecuador. Mongolia. Uruguay. 

I will be discussing these in more detail, and next week try to write something up about PGP and email security as I promised on Wednesday.

Of course, I’d like to hear from you about your own experiences.

It was with great irony and despicable deceit that UK Prime Minister Gordon Brown was commemorating the fall of communism in Berlin on Monday.  In his remarks, he insisted that the tide of history was moving towards our “best hopes,” and praised the people who helped end tyranny and bring down the wall.

Too bad it was all poppycock.

Simultaneously, Brown’s government back in London was announcing its plans for the rather innocuous sounding “Interception Modernisation Programme,” which is a law that grants the British government access to the phone records, emails, and web searches of its citize… er, subjects.

To be clear, ALL European Union member states, including the UK, are already required by EU Directive 2006/24/EC to retain private electronic data for a period of 6 to 12 months. The information that governments must collect includes the date, time, duration, source, destination, and device information of all electronic communication, to include phone and email.

I came face to face with this directive while attempting to use a public internet terminal in Italy earlier this year– the attendant was required to make a copy of my passport, and I was notified that my web activity would be logged.  Needless to say, I politely declined.

Despite these utterly draconian measures, the British government believes that the EU directive does not go far enough.

Now, the Interception Modernisation Programme plans to force all electronic communication providers (wireless companies, cable companies, internet service providers, etc.) to keep a record of every communication by every customer for a period of 1-year, and make the data available to 653 public agencies.

The most insulting part about the program is that the communication providers will be reimbursed for this inconvenience at taxpayer expense to the tune of about $360 million each year.

The UK turned into a surveillance state long ago… and unfortunately the trend is getting worse, not better.

There are legions of yellow vested government do-gooders in constant presence across Britain’s cities without any apparent mission other than to exist and take notice.

Similarly, during one stay at a swanky London hotel, I counted 7 CCTV cameras on the route from the hotel bar to my room.  I once counted over 20 cameras at a busy London intersection.

In fact, signs reading “CCTV Monitoring in Progress” are ubiquitous, even in places where there is absolutely, positively no camera present. It’s almost as if the government intends to spook people into behaving properly, just like the “Do not open door, ALARM WILL SOUND” signs you see in the US. 

Hey, nobody wants to be the guy responsible for the alarm sounding… better keep that behavior in check.

Ironically, the UK’s spying program has its roots in a 1985 law called the Interception of Communications Act; at the time, the European Court of Human Rights ruled that the practice of intercepting communications violated Article 8 of the European Convention on Human Rights.

Ah, once upon a time, privacy was a human right? But then again, we were all fighting godless Soviet commies at the time and went out of our way to underscore individual freedom and liberty. 

Now our governments feel the need to protect us from angry men hiding in caves, damn the consequences.

I think there must be a lot of boiling frogs in the UK that are starting to notice how hot the pot is becoming.  Sadly, the reality of all governments is that once a power is given to the politicians, it is rarely relinquished.

Consequently, do not expect the British government, or any other, to sound the ‘All Clear!’ bell and suddenly abdicate its ability to monitor the citizenry.

So… what to do?

We’ve talked about anonymous mobile phone calls, offshore email accounts and TrueCrypt hard drive encryption before.  In addition to these tools, there are email encryption platforms available like EndCryptor (www.endcryptor.com) and PGP, which I will review in greater detail in the future.

For a more private web surfing experience, you can use a browser add-on like Tor (https://www.torproject.org/overview.html.en), and go through a secure tunnel VPN that will change your IP address, like www.publicVPN.com

Let me know  if you’d like more information on these tools and I can write a more detailed article.  Furthermore, I plan on releasing a list of countries that I have traveled to where privacy is still the rule, not the exception.

Amazingly enough, Hugo Chavez is giving us a gift.  Allow me to explain.

World leaders are gathered today in Berlin, celebrating the 20th anniversary of the fall of the Iron Curtain.  What would have been the greatest armed conflict in the history of the world was successfully avoided… peace prevailed.

Meanwhile, thousands of miles away, Hugo Chavez is stoking the flames of war in his region.

Notwithstanding the collapse of European communism, Hugo steers a rather unwieldly ship of socialism in Venezuela.  Hugo calls his brand “Bolivarian Socialism,” named after the famous Andean political leader Simon Bolivar who had served as President in Colombia, Venezuela, Bolivia, and Peru. 

Ironically, despite the moniker bestowed by Chavez, Bolivar was an avowed proponent of the free market who admired Thomas Jefferson and traveled with Adam Smith’s Wealth of Nations.  Hugo’s policies are a far cry from Bolivar… but then again, the US government does not exactly promote the ideals of the Constitution either.

Now Chavez and the United States find themselves pitted against each other once again, this time through Colombia as an intermediary.  Colombia and the US recently signed a military agreement that allows the US to do what it does best– station American military troops in a foreign land.

In this case, the agreement calls for US troop deployments to seven military bases across Colombia.  Their mission will focus on counter narcotic operations and fighting the paramilitary insurgency. 

Realistically, though, the US is clutching on to its presence in the region.  American forces have already been kicked out of Ecuador, and since the withdrawal from Panama in 2000, the closest military installation with US troops is Soto Cano Air Base in Honduras… and as you are undoubtedly aware, Honduras isn’t exactly a beacon of stability these days.

Furthermore, to say that the US military is stretched thin is definitely the understatement of the day.  Sending even more troops overseas to fight yet another noun (this time it’s the war on ‘drugs’) may end up being the straw that broke the camel’s back.

Fortunately, we have little to fear from Hugo Chavez, at least in terms of conventional warfare.  Over the weekend, while Sarkozy and Merkel glad handed with former resistance leaders like Lech Walesa in Berlin, Chavez was addressing his troops.

“Let’s not waste a day on our main aim: to prepare for war and to help the people prepare for war, because it is everyone’s responsibility,” he said.  A few days before, he sent 15,000 troops to the  border with Colombia, citing fears that the US would use its new presence in the region to attack Venezuela.

The fact remains, however, the Venezuela unequivocally does not want to start an armed conflict.

Colombian forces are battle hardened veterans; they have fought for years against guerilla and paramilitary groups, and their combat experience is among the most extensive in the region.

Not to mention, the Colombian military is well-funded thanks to its alliance with the United States… and military funding means top of the line weaponry.

Venezuela forces, by comparison, are poorly trained, dreadfully equipped, and inexperienced.

Sure, a similar matchup took place in the 1980s between Iraq (funded and equipped by the United States), and Iran.  The Iranians had very little equipment or training– their chief combat tactic was to hurl waves of warm bodies at oncoming Iraqi tanks… and Iran had  a lot of bodies at the time.

The tactic worked.  Millions died, and the long battle of attrition between Iraq and Iran ended in a stalemate. 

Venezuelans, however, do not have the Iranian’s overzealous religious resolve, nor do they particularly care for Chavez and his brand of socialism.

Consequently, if Chavez initiated an attack, it would look like amateur night on the Colombian border. 

Chavez knows this, so all of his rhetoric is simply bombastic statement that won’t be backed up with action– unless something truly catastrophic and unexpected happens, like a clear act of war from the Colombians or the United States. This is highly unlikely.

In the meantime, Chavez will continue his peacock strutting and scare the world into thinking that war is imminent.  I think he’s actually giving us a gift, though.

In 2006, Israel and Lebanon held a brief war… a few people came. Markets got jittery, and both the Israeli shekel and Lebanese pound had a brief plunge.  They returned to normal levels quite literally within days.

In the last few weeks since the Colombia/Venezuela saga began, I’ve watched the Colombian peso sink by 8% against the US dollar.  Part of this has been a dollar rally, but most of the swing has been because markets are scared of war with Venezuela.

I’m convinced the fears are unfounded.

Chavez is shrewd and at least reasonably intelligent to have gotten this far. Venezuela is beset by major problems– crumbling oil infrastructure, water scarcity, frequent power outages, etc. War is a great way to distract and unify the masses, but walking in to an absolutely certain military defeat is a fool’s bet.

As such, I think that if the Colombian peso continues to fall, especially past 2,050, it should make a reasonable short-term investment.

Do you think your government doesn’t have the means to listen to your phone calls?

Think again.

Governments from around the world, not just exclusive to North America, have technologically advanced eavesdropping programs which can capture mobile phone conversations without anyone ever knowing.  And just in case the government isn’t so technologically advanced, they coerce wireless carriers into coughing up encryption schemes (cough, cough, Russia)…

Unless you have your own two-way encryption or intricate scrambling mechanism, there is no way for you to prevent this eavesdropping. What you can do, though, is make sure the government doesn’t know who’s on the line.

Right now, there are two key data points which identify callers to snooping federal agents:

First, the wireless signal from your conversation transmits unique identification codes that link back directly to your specific wireless account… and your wireless account contains a host of personal information– name, address, social security number, and naturally, phone number.

Second, most legitimate mobile phone handsets and data devices have a special serial called an IMEI number.  IMEI stands for “International Mobile Equipment Identity,” and it serves to uniquely identify a piece of wireless equipment.

In theory, the IMEI number is only associated with the equipment; in practice, though, wireless companies monitor and track who is using a particular piece of equipment… their systems are constantly matching a handset’s IMEI number to the subscriber data found on the SIM chip.

You can see your own IMEI number by pressing “*#06#” (as in star-pound-zero-six-pound) on your mobile phone. The number indicated on your screen is absolutely positively linked to your wireless account.

In other words, when you use your handset, the wireless company knows it’s you, and so does the government.  Just like unencrypted email communication, mobile phone conversations are about as private as shouting something across a crowded subway station.

Personally, this bothers me on a philosophical level… not to mention that there are times when I just want to have a private conversation with somebody without having to worry about which federal agency is taking notes to put in my file.

As you could imagine, I have a solution.

Do you remember when you first signed up for your mobile phone service? In many places you have to give the company all sorts of information and identification– even for prepaid service. It’s actually quite revolting.

There are some countries, though, where buying prepaid mobile phone service doesn’t require three forms of ID, a stool sample, and a reference letter from your priest… you just walk up to the counter, give them the money, and they give you a SIM chip. Simple.

While there are several countries where you can do this (Uruguay, China, etc.), I believe that Panama poses the best solution. Here’s what you do:

The next time you find yourself in Panama, go to any shopping mall or electronics store and buy a prepaid mobile phone SIM chip– the one you want to buy is called “Mas Movil Roaming Prepago,” and it should cost you about $5.

Mas Movil Roaming Prepago is a prepaid mobile phone service that was specifically designed for use outside of Panama– it works very well in the United States, South America, Spain, France, Belgium, Ukraine, and Russia.  Sorry Canadians, no service there to the best of my knowledge, eh.

Your shiny new MasMovil SIM chip will have a unique Panamanian phone number that is NOT tied to your name. The next thing you need to do is purchase a new mobile phone– there are plenty of cheap phones in Panama to choose from, many ranging from $10 to $20.

Again, this new phone will NOT be tied to your name personally.  It is important that you ONLY use this phone for your Mas Movil Roaming Prepago chip, otherwise it could compromise the anonymity of your new phone’s IMEI number.

Lastly, since Mas Movil Roaming Prepago is a prepaid service, you will need to buy several top-up cards to charge the balance on your account; these top-up cards come in a variety of denominations– I would suggest an initial balance of at least $20 and recommend that you buy a few spare top-up cards to recharge your account once you’ve left Panama.

Naturally, it would behoove you to pay cash.

Now, for the price of less than $50, you have a new phone, phone number, and charged-up SIM chip, none of which are tied to your name.  When you return to your home country, you will be able to call anyone you wish knowing that you are completely anonymous.

Call rates are $0.99/minute in the United States, so use sparingly.

While I was en route to China, somewhere over the Sea of Japan, gold hit a record high on ‘concerns’ about the long-term value of the dollar.

Frankly, 1974 was probably the time to be ‘concerned’ about the long-term value of the dollar.  The remaining institutional investors who are only now finding reasons to be concerned about the dollar are probably the same ones that thought Ford and Fannie Mae were bargains last year.

The dollar is likely having such a volatile day thanks to this article from the UK’s Independent. The article asserts that Russia, China, and the Gulf Arab states have been holding secret meetings to plan a transition away from dollar-priced oil.

According to the article, which cites ‘Arab and Chinese banking sources in Hong Kong,’ the plan’s deadline for complete transition is 2018.  This date makes sense considering that the longest-dated oil futures contracts expire in December of that year… but are the claims legitimate or simply rumor?

Who knows. Saudi and Russian authorities have already denied the newspaper’s allegations, but this is to be expected.

While gold may be getting a friendly bump thanks to the Independent’s article regardless of whether the claims are true, it is unquestionable that the dollar’s long-term value is heading south.

On the plane ride to China, I was reading a rather interesting “Trade and Development Report” published recently by the United Nations.  The report provides concrete data for how governments around the world have reacted to the financial crisis.

One of the things that caught my interest in the report was a table on page 66 tallying fiscal stimulus programs and government bank guarantees as a percentage of GDP.

The United States, for example, has backed its banking sector with a whopping 81.1% of GDP.  The United Kingdom, Sweden, Netherlands, and even Japan ring in at 81.7%, 70.2%, 46.5% and 22.3% respectively.

“Developing” nations like Brazil, Chile, Taiwan, Philippines, and Thailand? 0.0%. China came to the table with 0.5%.

The data certainly begs the question– which of these groups should actually be considered ‘developed’?

Ironically, most western ‘developed’ governments, led by the United States, have only been able to make these multi-trillion dollar bank guarantees because of the generosity and savings provided by ‘developing’ countries through US Treasury purchases.

‘Developing’ countries are weary of this model– Chinese and Taiwanese no longer live for the pleasure of exporting their products to the West in the hopes of being paid in US dollar IOUs.  Consequently, the concept of a new reserve currency is one that has legs and will in all likelihood become a reality.

If, under influence from western governments, the IMF decides to not go along with a new reserve currency scheme, the strongest developing nations will likely conspire to create their own internal mechanism.  The US and Europe will be forced to go along with it as a matter of necessity.

This is why gold and silver have such tremendous long-term potential– they will anchor the new reserve currency. Sure, there is the inflation/hyper-inflation argument that will send gold sky-high (though I would suggest that there is ample evidence of deflation as well).

Predominantly, though, precious metals will rise as a function of capital inflows– foreign governments are sitting on trillions of US dollar reserves that they are trying to get rid of.  Gold is where they are going to park most of it.

Three months ago I wrote about some silver investments that I was making– I sold $10 December 2011 put options and bought $15 December 2011 call options. In each of these investments I was betting that the future value of silver would rise.

In 3-months these investments have more than doubled, and I am now analyzing the futures markets to find the best ways to invest directly in gold and silver.

In part, this is what I am doing back in Shanghai.  My longtime friend and colleague Christine Verone is the first foreigner ever to be certified by a Chinese exchange, and I plan on taking new gold and silver positions based on her insight of the Asian markets.

More on this in future letters. In the meantime, look after your savings if you’re dollar-based.  If your savings is sitting in the bank collecting dust, either get it out of the dollar, or put it to work generating a real return.

It’s not time to be on the sidelines anymore.

Last month, a Wyoming bank employee was routinely emailing some loan documents to a customer’s personal Gmail account. It sounds like a simple enough task, yet somehow the employee made an enormous error.

Not only did he erroneously attach a file to the email that included the names, addresses, tax IDs, and loan information for 1,325 customers, but he sent it to the wrong Gmail address!

We’ve all been there… victims of our own fat-finger negligence– good intentions gone horribly wrong because our technology moves so quickly.

And so, with pulse pounding and panic setting in, the bank employee immediately sent a follow-up email to the mistaken address, pleading with the account owner to delete the sensitive data and contact him as soon as possible. And then he waited…

After several days had passed without response, the bank contacted Google for help. They wanted information about the unintended email recipient– is the Gmail account even active? What is the account holder’s name? Would Google take steps to ensure that the confidential information is not open or disclosed?

Google refused to comply without a court order, so the bank sued… and in this particular case the wheels of justice moved rather swiftly– within a few weeks, US District Judge James Ware ordered Google to temporarily deactivate the recipient’s Gmail account and disclose information about the account to the court and to the bank.

Days later, Google and the bank jointly announced that the issue had been resolved… but because of the court order, the user’s email account has to remain deactivated until the judge hears the case again on October 5th.

I read through the case files with great interest because, frankly I was disgusted that ‘the honorable’ Mr. Ware could compel Google to deactivate an individual’s email account.

Sure, the bank employee made an unfortunate mistake. But email accounts are deeply personal, even more than physical home mailboxes. I wondered if the employee had accidentally put a physical package in the mail to the wrong mailing address, would a federal judge direct FBI agents to beat down the recipient’s door?

Doubtful. Rather the judge would have told the bank, “Sorry guys, but you’d better start notifying customers of the security breach pronto.”

Advances in technology have a significant impact on the world; as I am fond of saying, technology is key economic growth engines over the long-term. But governments and regulatory authorities have a bad habit of abusing the ease and comforts that technology provides as a means to erode personal privacy.

Email usage, web searches, e-commerce, credit cards, etc. all make life easier and more convenient for consumers. They also make it easier for the government to keep tabs on our activity and whereabouts– and as this Google case demonstrates, the burden of proof required to violate an individual’s electronic privacy is quite low.

To take a page from WG Hill’s ‘Three Flags’ approach, I believe wholeheartedly in spreading one’s sovereign risk among different jurisdictions– establishing residency in a country that values foreign visitors, while maintaining citizenship in a country that doesn’t tax worldwide income and basing assets in yet another no-tax/low-tax jurisdiction.

To this approach, however, I would add another ‘flag’: jurisdictions in which an individual should base sensitive and electronic assets. The goal is to ensure that the computer server where your email is hosted, as well as the company which owns/manages the servers, are both outside of your country of residence and citizenship.

Clearly there is going to be some element of counterparty risk in any transaction that involves more than one person; but if the Gmail recipient had been using an email account in, say, Singapore or Switzerland, the chances of a foreign judge ordering the account to be deactivated are slim to none… and slim’s out of town.

Below I provide a links to a few offshore email providers whose servers are located overseas. With a properly configured account, you can switch to an offshore provider and still keep your existing email address:

Neobox-  http://www.neomailbox.com (Netherlands)

e-mail.ph-  http://www.e-mail.ph (Philippines)

HongKong Mail-  http://www.mymailhk.com (Hong Kong)

mBox-  http://www.mbox.com.sg (Singapore)

Green-  http://www.mails.ch (Switzerland)

Swiss Mail-  http://www.swissmail.org (Switzerland)

Remember, using these providers decreases the likelihood of your email account being confiscated or deactivated by your home government– offshore email hosting does not guarantee privacy or security unless you use encryption schemes (to be discussed in the future).

If you have suggestions for other providers, please let me know.

“We are very concerned with what’s happening in Panama, or to put it another way, what’s not happening.”


– Jeffrey Owens, director of the OECD Centre for Tax Policy and Administration

Earlier this month, a group of tax commissioners, finance ministers, and NGO representatives descended upon Los Cabos, Mexico for the 5th annual “Global Forum on Transparency and Exchange of Information” sponsored by our friends at the OECD.

You will likely recall that the OECD published its ‘black list’ and ‘gray list’ of non-compliant financial centers, coinciding with the G20 summit in London this past April.  Offending nations ranging from Uruguay to Switzerland immediately scrambled to have their names stricken from the list.

The OECD called this month’s forum in Mexico to make sure that remaining tax havens have either already stepped into line, or are breaking their necks to get there.

The primary regulation in question is the OECD’s controversial standard for information exchange, known as “Article 26.”  This is the standard which requires countries to exchange information with other nations for the purposes of tax reporting, regardless of domestic bank secrecy laws.

Austria, Belgium, Luxembourg, and Switzerland were the last of the OECD members to hold out on Article 26, but each has recently caved to pressure and acquiesced to violating their own laws for the sake of international tax information exchange.

With a united OECD standing against them, smaller countries who were holding out against Article 26 compliance have no remaining support, and you can be sure that each of them will fall into line: this is evidenced by the spate of “Tax Information Exchange Agreements” signed by smaller countries in the last month.

29 exchange agreements have been minted this month alone by countries like Gibraltar, San Marino, Andorra, Liechtenstein, Monaco, Aruba, Anguilla, and Nevis.  Conspicuously missing from the list?

Panama.

In the introduction to this missive, I quote the venerable Mr. Owens as he responded to a reporter’s question in Mexico– why does Panama attract such little scrutiny since it has not signed any tax information exchange agreements?

Panama was placed on the OECD’s “gray list” in April as a “jurisdiction that has committed but not yet substantially implemented the internationally agreed tax standard.”  In order to be taken off the list, gray list jurisdictions must sign exchange agreements with at least 12 other jurisdictions.

Apparently Mr. Owens’ remarks lit a fire under the Martinelli administration in Panama; the country recently announced that it would begin sharing tax information and is close to inking deals with Spain and Mexico already.

You can expect deals with the United Kingdom, United States and Canada to be close behind.

So does this spell the end of Panama as a financial center?  No. Likely it means the survival of Panama as a financial center because noncompliance will threaten its financial infrastructure.

BNP Paribas, for example, which is one of France’s largest banks, recently announced that it would close all branches in non-compliant countries, including Panama.  Similar announcements by other banks will likely be forthcoming.

Consequently, if Panama does not want to lose the integrity of its financial center, compliance is a must.

The unfortunate reality of the global financial system is that traditional tax havens like Panama, Hong Kong, BVI were specifically designed to hide money; this veil of secrecy has now been ripped to shreds by the OECD, and privacy is no longer a reason to hold money offshore.

Governments are scrambling to become compliant, and sooner or later every bank in every jurisdiction will be coughing up depositor information to foreign tax authorities.

That’s the bad news.

The good news is that banking offshore still provides substantial benefits for consumers and their after-tax income, namely:

• Many overseas banks are stronger, more liquid, and better capitalized than western banks, and they don’t depend on an insolvent organization to guarantee deposits
• Overseas banking provides opportunities for currency diversification
• When western countries begin imposing capital controls (we know they’re coming), your money will be safe in a foreign bank, allowing you to freely withdraw, transfer, and invest your capital as you see fit without asking permission from the government.

Despite the OECD’s actions, I still believe that banking overseas is a smart move for everyone… just be sure that you personally comply with your reporting obligations. US Citizens, for instance, must report overseas bank accounts to Uncle Sam every year, and if you received a penny of interest, it must be reported on your tax return.

First of all I really appreciate all of your thoughts and comments this week; I would definitely encourage you to spend a few minutes reading the comments on ‘Give me Liberty or Give me Boarding Pass’ posted on Tuesday.

One question in particular that I would like to address came from Amanda:

“Simon aren’t foreign governments even more likely to seize foreigner’s assets since they have no votes to lose?”

Personally, I believe that a well-selected foreign government is much less likely to seize foreigners assets than western governments.

Why? Because smaller countries are much more dependent on ‘wealthy foreigners’ than your home government. If they develop a reputation of not respecting foreigners or their assets, revenue drops off a cliff.

In contrast, you are just a worthless individual in the United States– a speck… a peon among the masses. You have no power.

Think you own your home? Guess again. It can be seized at any time by any variety of government agency at local, state, and the federal level for an endless list of infractions that vary from the mundane to the absolutely ridiculous– taxes, trade violations, drug enforcement, zoning violations, child protection, etc.

Even without this anti-carrot that is constantly being dangled, the government gives us constant reminders that we’re just renting our property from them.  An email from a subscriber underscores this point:

Simon– I happen to own some vacant land located about 1km from a large shopping area in my town.   This land is located on a busy road sandwiched between one of my homes and a condo complex.   My wife is a yoga instructor and was looking to expand her studio, so we thought we’d consider building a first class facility on the vacant lot.

When we went before the zoning board to tell them what we wanted to do, they basically laughed at us and told us that, “If you really want to support the community, you should lease one of the empty spaces in one of the local strip malls.”

Funny thing, I didn’t say anything about “supporting the community.”  All I wanted to do was build a structure on my own property.  I figure that since I pay such an enormous amount in taxes and take zero services from the city/state, I’m already doing my part to “support the community”.

Simon again. This story is indicative of where I see the culture headed– it is more important to be a ‘responsible party member’ than to advance your own self-interest.  Apparently the definition of “life, liberty, and the pursuit of happiness” is now left up for interpretation by county employees.

I feel much more free in many foreign countries, secure that I actually OWN my property, and happy that the government just leaves me the hell alone.

Sure, the United States has better marketing than most countries as the ‘land of the free’– there are no unquestioning, flag-waving Chileans or Panamanians bombastically singing songs about their freedom like well-programmed robots.

And that’s what makes living overseas a well-kept secret. Most people are brought up to believe that (^ insert your home country) is the greatest country in the world. They believe it, unwaveringly… and think that anyone who would move is simply crazy.

I usually explain it by drawing an “X”.  I start from the top left and say– this is the United States. Right now we’re up here, close to the top, but quickly heading in this direction (drawing line towards the bottom right).

I stop halfway to the bottom and put my pencil on the bottom left.  This is many overseas countries. They’ve started near the bottom but are quickly growing in this direction (moving line towards the top right).

Right now, the US may still be ‘above’ the foreign country… but at some point, and likely soon, the two lines will cross. The US is heading towards the bottom, and the foreign country is headed higher.

As an opportunist, I intend on establishing myself there before the two lines cross.

Roughly $100 billion.

Even in today’s world where politicians throw out the word ‘trillion’ as if it were a casual dinner garnish, $100 billion is still a lot of money… especially when you’re desperate to sustain glimmers of economic growth and trying to plug a budget shortfall that amounts to 13% of GDP.

And yet, roughly $100 billion is exactly what got sucked out of the United States in July by foreigners: “Net capital outflows” increased to $97.5 billion for the month of July, according to recent data released by the Treasury department. Meanwhile, net long-term capital inflows fell to a paltry $15.3 billion in July, an 80% decline from June’s $90.2 billion capital inflow.

What do these numbers mean?

Foreigners are continuing to lose confidence in the US economy at a record pace and are finding better places for their money. This would certainly support the US Dollar Index’s dramatic 3.5% decline in July– though the dollar index only tells a partial story. “DXY” as it is known, though, only tells part of the story.

The dollar index measures the value of the dollar only relative to a small basket of currencies– euro, pound, Canadian dollar, Swedish koruna, yen, and Swiss franc. Powerful Asian nations like the Gulf, China, Singapore, etc. are conspicuously missing. And yet, DXY still dropped 3.5% in July.

Conclusion? If these ‘relatively harmless’ countries that comprise the US Dollar Index are losing confidence in the greenback, you can be sure that China and the Middle East are knocking over women and children on their way to the emergency exit.

Telling you that the dollar will be continually worth less until it is ultimately worthless is nothing new. So if you would indulge me a moment, I’d like to prognosticate on the greater implications.

As the pace of these outflows picks up steam, you can be sure that a group of out-of-touch politicians are monitoring the data and thinking to themselves, “we need to regulate this before it gets out of hand!” And this sentiment is exactly what spawns capital controls.

Capital controls by design are intended to regulate the flow of capital in and out of a currency; in times of uncertainty, shaken politicians always pull this oldie-but-goody out of the playbook… it happened in Iceland, and it’s been discussed around the world recently– Russia, India, Brazil, the Baltics, Poland, Czech Republic, Kazakhstan, etc.

Not to mention, a world largely free of capital controls is a relatively new phenomenon. We can look to history for a recent example of a world superpower turning to capital controls for ’stability’:

In the mid 1970s after the collapse of the Bretton-Woods system, the British economy was in serious trouble. GDP was contracting, unemployment rising, investment falling, and the government was drowning in red ink, all while social obligations were climbing.

Financial markets responded by turning their backs on Britain’s Pound Sterling, and the currency was crushed. The Wall Street Journal advised investors to ditch the British pound, running headlines “Good-bye Great Britain.” And the government came under intense pressure to ‘do something.’

The first thing the UK did was go to the international community with hat in hand to prop up the currency with loans and bonds. This is already happening in the United States as Tim Geithner attempts to woo China and Middle East into buying US Treasuries.

Subsequently, the British government imposed a slate of capital controls that essentially penalized investors for moving capital out of the country and requiring that all investment transactions go through ‘authorized dealers’ who were charged with enforcing this policy.

The penalty ranged from a 10% to 30% premium on the dollar/Pound spot rate at the time– essentially the same tactic that the Cuban government is employing today.

Frankly I can see the same thing happening in the United States, perhaps starting off with a penalty in the Treasury markets where there is the biggest sucking sound… imposing a sort of ‘restocking fee’ for foreign investors who don’t roll over to new issuances upon maturity.

Eventually, though, you can be sure that the government will impose controls at the consumer level as well– requiring a certain allocation of bank deposits to be held in US Treasuries, restricting foreign remittances, and mandating scrutinous approval for overseas wire transfers above a certain amount.

Naturally, US politicians would never call such measures ‘capital controls,’ because the world’s reserve currency must be freely convertible. They will likely wrap up these policies in the ‘anti-terrorism,’ ‘money-laundering,’ or ‘tax evasion’ blankets, and simultaneously wage a PR war against evil gold and currency speculators.

So what can you do? As I’ve mentioned before, buying foreign real estate is the single best way to move money overseas where it cannot be forcibly repatriated. Physical gold stored overseas is an excellent option as well– there are no reporting requirements for either.

I’ve also strongly suggested buying up such assets with tax-deferred retirement savings. In my opinion, there’s no better way to stay within the letter of the law than to buy foreign investment property and physical gold through a self-directed IRA… I am such a strong believer in this tactic that I negotiated a special discount with a trusted service provider who can set this up for you.

As I conclude this missive today, I see that the “world’s leaders” are gathered in Pittsburgh to listen to the sound of their own voices. Nothing will be accomplished, and they will emerge from their summit with nothing but sound-bytes, empty promises, and a continued fervor to exact tighter control over the markets.

Each of us has the ability to either plan for it, or dismiss reality and do nothing.

I’m in the United States through the end of next week out of necessity… I need to tie up some loose ends (read: taxes!).  Once I get my confession mailed out to Uncle Sam, I’ll be out the door once again.

Whenever I am in the United States, I always think deep thoughts about liberty. This place has changed so much since I was a child that it is hardly recognizable.

When people overseas ask me where I’m from, I always say that I’m an American… which is simply a reflection of my state of mind, not geography.  As my friend Doug Casey says, ‘America’ is an idea, not a country.’  I agree entirely.

America as an idea espoused economic and individual freedom, limited government, entrepreneurial risk-taking, and a market-based economy.  America was the one place in the world where rags-to-riches stories were commonplace, and where wealth was held up in a respectable light.

The United States has drifted a long way from America.  To underscore this point, I’d like to share an email that I just received from a close friend of mine who lives in the Midwest, ‘America’s heartland’:

Dear Simon-

As you know, I have two young children who attend pre-school at a local Montessori school.  The school is completely private and quite expensive… not a single dollar of public funds goes to this school even though I pay out the nose in state taxes to support public schools.

Yesterday, the county health inspector decided to show up and go through the health records of all the students.   Naturally I was immediately bothered that a public official could go through what I consider to be private records.

The truth is, after lengthy conversations with her pediatrician and a lot of self-study, my wife and I decided against many of the immunizations.

Frankly I don’t see the benefit in sticking my child full of a bunch of unnecessary chemicals. I didn’t get most of these shots when I was a kid and yet somehow I managed to live this long.

Regardless, the county health jackass gave us **one week** to get her ‘caught up’ on her immunizations, or else she will be forbidden to attend this PRIVATE school anymore.

The only way out of this is if I apply for an immunization exemption for my daughter on the grounds that our religion forbids me to have her inoculated.  Here’s the actual text of the document that I have to sign and have notarized:

“A religious exemption may be granted to an applicant if immunization conflicts with a genuine and sincere religious belief.   A Certificate of Immunization Exemption for religious reasons shall be signed by the applicant or, if the applicant is a minor, by the parent or guardian or legally authorized representative and shall attest that the immunization conflicts with a genuine and sincere religious belief and that the belief is in fact religious, and not based merely on philosophical, scientific, moral, personal, or medical opposition to immunizations.  The Certificate of Immunization Exemption for religious reasons is valid only when notarized.   Religious exemptions do not apply in times of emergency or epidemic as determined by the state board of health and declared by the director of public health.”

It infuriates me that the government requires me to have my child immunized to attend a private school.  If I disagree for medical or philosophical reasons then that’s not OK… but if I’m a Scientologist, then they’ll let me off the hook.  Are you kidding me?

I have little doubt that the lack of immunizations for my children demonstrates to the state that I’m a bad parent.   How long before Child Protective Services comes knocking on my door for a little home inspection?

Simon again.

I probably visit at least 30 countries each year… and to be completely frank, there is no perfect place.  But as free people we are able to decide for ourselves where we want to live, under what level of government– to ‘opt-in,’ if you will, to the set of regulations that we are willing to live under.

And believe me, there are a hell of a lot of places out there where my friend wouldn’t have to deal with this type of coercion.

Sure, the US is a comfortable place to live, but as my friend points out some of the critical freedoms are being erroded right under our noses.   The distinction between private and public is blurred.   The idea of being a “responsible” citizen is being held up as the ideal compared to personal liberty.

The US is on a downward trajectory. Many other places are on an upward trajectory. It is only a matter of time (and not too much time, at that…) before other countries surpass the United States’ quality of life.  Many already have.

After all, it’s easy to build a Starbucks, Super-Target, and endless rows of McMansions.  The hard part is finding a place where the government leaves you alone to live your life and prosper, and surrounding yourself with people who feel the same way.

Do you have similar stories? Do you agree that the US is on a downward slide, or do you believe that it’s still the best place to be? I’d really like to hear what you have to say.

He was brown.

A few inches shy of 6 feet tall and well-dressed in a tailored suit, my guess was that he was of Lebanese origin given his easy command of French, English, and Arabic… but regardless, he was standing in the US citizen line at the airport immigration checkpoint.

I don’t know exactly what was said between the man and the border patrol agent, but the encounter was brief; within 30-seconds he was being escorted to the secondary screening room.

Given that I had briefly chatted with this gentleman on the plane from Tokyo while waiting for the lavatory in the business class cabin, I considered him to be a ’single-serving friend’ and felt comfortable enough to approach him later when I saw him later waiting for his wife.

“What happened back there?”

“Oh, typical. He asked me how long I was gone and if I had purchased anything while abroad… I said ‘6-weeks’ and ‘no,’ which must have set something off, so they sent me to the back room.”

“Yeah I’ve been there… it’s big fun. But you weren’t in there for too long.”

“No- it was quick. I hadn’t sat down for more than 2 minutes before they called my name, asked me some questions, and said they would need to search my laptop. Naturally I complied, you have no rights in there, and I just wanted to get home as quickly as possible.”

“So did they seize your computer?”

“No, they told me to log in to my computer. I did…. then one guy, he was really fat, disappeared with my laptop for about five minutes. When he came back they escorted me down to baggage claim, sent me through the ‘red line’ to inspect my checked bag, and that was it. The whole thing was over in 15-20 minutes.”

I was floored.

Not because the US government is detaining its own citizens and inspecting their most private possessions without reasonable suspicion of wrongdoing, but because of the speed and efficiency with which they are now doing this.

I have long believed that in the United States there are two places where civil liberties do not exist– tax court and the airport.

In the former, the IRS has the full authority to put the habeas grabbus on whatever assets they feel like with a ‘presumed guilty until you go broke proving your innocence’  burden of proof.

Airports though, in my opinion, are even more draconian.

Under the catch-all auspices of anti-terrorism, the government’s border and airport security agencies have been dealt an enormous amount of authority to go along with their intimidation tactics; thanks to a recent ruling by US Court of Appeals, border agents have nearly unlimited latitude over personal effects, including laptops:

“The authority of the United States to search the baggage of arriving international travelers is based on its inherent sovereign authority to protect its territorial integrity. By reason of that authority, it is entitled to require that whoever seeks entry must establish the right to enter and to bring into the country whatever he may carry. . .  Therefore, we are satisfied that reasonable suspicion is not needed for customs officials to search a laptop or other personal electronic storage devices at the border. “

Subsequent to this ruling, US Customs and Border Protection issued its own policy regarding search authority:

• Officers may, without reasonable suspicion, detain documents, electronic devices, or copies thereof for a ‘reasonable’ period of time to perform a thorough border search, which may take place on-site or at an off-site location;
• In the event that contents are unreadable or encrypted, officers may enlist the support of other agencies for translation and/or decryption assistance;
• Content that may constitute trade secret, commercial information, or even attorney-client privilege are still subject to search and seizure.

The singular exception to this rule is ’sealed letter-class mail’, the international equivalent of First Class– sealed letters that are presently within an international postal system (NOT including private carriers like FedEx or DHL) cannot be searched or seized without a warrant or consent.

I will also be discussing some savvy encryption solutions in future letters; in the meantime, though, be mindful of what you bring along during international voyages– except for the ‘mail loophole’ I mentioned above, just about anything you bring into the country can be searched and seized without reasonable suspicion.

Right now, your retirement funds are probably locked up and being managed by a handful of bureaucratic monkeys– the same ones who thought the US real estate market would always go up and the Dow would hit 20,000.

But there’s an easy way to take control of your financial destiny– to invest your retirement funds in whatever you like, wherever you like, including foreign real estate.

I’ve long believed that buying property overseas is the single best way to move money out of the country, protecting your capital from a depreciating currency, exchange controls, and government scrutiny. Foreign property is not reportable, and it’s a hell of an insurance policy in case things get really bad.

You probably have the money to buy foreign property sitting right in your retirement account… but you can’t use it because you had to park your funds into one of six paltry mutual funds.

Taking control is critical.  If you have an IRA or a retirement plan and are not taking advantage of this simple self-directed structure, you could be making a huge mistake.

So… given the extreme volume of questions that I have received on the subject, I once again turned to my friend and partner Matt to help find the answers.  Matt, who is a very astute investor and entrepreneur, went straight to the source– Steve Sheppard, the founder of CheckBookIRA, a company that sets up these self-directed IRA structures.

Matt got Steve on the phone to explain a little more about how the program works– the interview could be the most informative 23 minutes you’ll have this year.   You’ll love how Steve’s wife uses her IRA to make 35% a year (tax free)  in the cattle business.   Near the end Steve says some really great things about our subscribers and mentions the discount that we negotiated specifically for our subscribers.

Do yourself a huge favor… Grab a pen and paper, go to a distraction free environment and set aside the next 23 minutes to listen to this interview.

Click here to download the mp3 file:

http://media.libsyn.com/media/withoutborders/Skype_20090901_1807.mp3

Maximizing the flexibility of your retirement account is an enormous untapped area of Low Hanging Fruit for US investors.

In fact, this might be the single easiest thing you can do right now to grow your retirement assets while shielding them from the lost decade yet to come.

With a properly structured, self directed IRA, you can gain complete control over your retirement funds, and, according to IRS rules, invest in anything other than collectibles and life insurance so long as there is no self-dealing involved.

You can invest in:

- Gold that you store in your home
- Foreign real estate
- Gold stored securely overseas
- FOREX, hard money loans, Options, Stocks & Bonds

And of course much more…

The structure is simple.  You invest your IRA funds in a special LLC.   You’re appointed the Manager of the LLC and direct the activities of the LLC whether that be buying farmland in Argentina, a condo in Panama City, a Perth Mint certificate, or a big pile of gold coins to be stored in an Austrian vault.

There are rules, of course.   Everything needs to be set up properly, so don’t proceed without consulting an expert.

The good news is that setting up this structure isn’t rocket science and once you do it you’ll be glad you did.

=====

Update: Spring 2010 — Friend of Sovereign Man and noted Economist, Terry Coxon, just released an e-book called Unleash Your IRA. In our opinion, structuring your IRA properly is something you should do right now and Terry’s guide explains how to do everything step by step.

I’m really disturbed by what’s happening in Alabama.

You’ve probably heard– Jefferson County/Birmingham’s board of knucklehead politicians has managed to drive local finances into the ground over the last few years. Faced with unserviceable debt and a string of large losses from complex derivative instruments, the county is effectively bankrupt.

The good news is that the government is being forced to make deep, deep budget cuts, including ‘essential services.’  Personally, I have no problem with this– I have long wondered why nuisances like driver licenses, license plates, and business permits even exist, let alone be considered ‘essential.’

The disturbing part is that the local government is paring back its police force.  By itself, I would welcome this as good news– I have a natural disdain for ‘law enforcement’ and would rather take my chances with criminals than with police.

Furthermore, I have lived in many places where local police forces take a backseat to private security guards who are charged with actually protecting people and property instead of harassing customers.

Unfortunately, instead of going the private route, Jefferson County is talking about calling in the National Guard… and the thought of simultaneous military HMMW-V patrols in Baghdad and Birmingham is not a vision of America that I care to participate in.

It’s not isolated to Alabama– this scenario is playing out in city halls and state legislatures across the United States. I believe wholeheartedly that this will be the  ‘next next’ shoe to drop (after commercial real estate– more on this later in the week): an implosion of state and local government finances.

During good times, unemployment was low, real estate values were high, and consumer spending was an addiction. Consequently, tax revenues from income, property, and sales were very high. Governments were living high off the hog with the public’s money building bridges to nowhere and expensive office buildings to house their bloated bureaucracies.

Today, tax revenues have dried up but the bloated bureaucracy remains. Suddenly the interest payments on all those school and sewer bonds are unserviceable and the parks department is bitching for new lawn mowers… ‘essential services.’

What’s happening in Jefferson County is simply a prelude to this requiem.  After the commercial real estate dust settles, the preponderance of state and local governments will be in a similar state of fiscal emergency.  Local governments will have their hands out to the states, and states will have their hands out to the federal government.

This is when things will become very difficult, and it goes much further than military personnel patrolling the streets.

Emergency taxes, wealth confiscation, and capital controls will likely be part of this future as the government ensures that every American is doing his/her patriotic duty to bail out the government.

Each of us will be faced with a choice– bail out… or bail? Continue participating in this corrupt bureaucracy, or find freedom elsewhere? After all, there’s a lot of wonderful places in the world and now is the time to prepare– do you have a lifeboat strategy yet?

If not, I strongly recommend you take some time to listen to asset protection guru Mark Nestmann.  We interviewed him a few weeks ago and his advice is worth its weight in gold. There are steps that you can take now to protect your wealth, protect your family, and protect your freedom– click here to listen to the interview.

Did you ever notice that when you put the words “The” and “IRS” together it spells “Theirs” ? How appropriate.

One of “Theirs” initiatives that I pay attention to is its voluntary disclosure program. This program provides steps for people who have not reported overseas income (and bank accounts) to come clean without criminal penalty.

Recently I found out that more people have come forward to confess their sins under the program guidelines in a single week than all of last year combined.

People are obviously scared… and watching Joe Biden’s jaw clench as he emphatically proselytizes about ‘patriotic duty’ and ’sacrifice’ to finance irrational and unconstitutional spending initiatives, it’s easy to understand why they’re scared.

This is yet another reminder that as long as anyone holds a US passport, s/he is subject to full disclosure annually.  Contrary to popular belief, leaving out some of the details is not a viable solution.

In fact, a tax attorney who I know quite well once remarked “failure to fully report ALL of your income will land you in worse trouble than not filing a tax return at all.”

Bottom line: don’t cheat. File the forms properly, and tell Uncle Sam about your overseas accounts.  The alternative is just not worth it.

Remember, the whole point behind opening foreign accounts isn’t about tax fraud or even mitigating taxes; the key reason is to get your money in a safer, free place where you can control it and safeguard its purchasing power.

Besides, the day that “Theirs” decides to take a little dip into your savings account, you won’t be frozen out without a lifeline. Given the rapid increase of individual and small business audits, I unfortunately see this as being commonplace in the near future.

The strange thing is that, despite the administration’s constant trumping that only the wealthiest Americans are being targeted, “Theirs” is indiscriminately shaking everyone down in its grab for cash.

The Joe Biden ’sacrifice’, after all, is everyone’s burden.  Everyone… except for the government.

The much-heralded Obama budget cuts, which will ’save’ $243 million, include nickel and dime line items like the Justice Department’s now-infamous double-sided copy paper concession (although Congress’s recent $200 million private jet purchase has pretty much burned through those savings already).

One of my favorite line items is how the Forest Service plans on saving $1.8 million by not painting brand new vehicles.  This, of course implies that they’re buying loads of new cars… roughly 600 based on my calculations.

Clearly the Forest Service must need new cars pretty badly to be spending so much on cars during this time of penny pinching…. except that the Forest Service isn’t actually required to pinch pennies– its discretionary budget increased by 8.9% for 2010.

According to the Forest Service’s own website, in fact, the President’s budget (and the 8.9% increase) “reflects our Nation’s (with a capital ‘N’) highest priorities…”  I won’t dwell on the absurdity of these priorities, but I will point out some basic math.

The 8.9% budget increase represents $465 million, out of which they were able to squeeze out a reduction of $1.8 million, or 0.3%.  That, my friends, is real pocket change you can believe in.

At some point when this seems too absurd for reality, the solution of expatriation will become abundantly clear. One of the benefits of internationalizing yourself is that you will start to view these events as if watching tree sloths at your local zoo– curious, slightly funny, but largely irrelevant.

…. somewhere I can hear Howard Beale.

Nationalized healthcare doesn’t work, and I’ll tell you why:

I hold as my personal mantra in life that governments screw up everything they touch… and this goes for all governments, not just the United States Congress.

As I travel the world looking for great opportunities, I always try to understand the quality and efficiency of the local healthcare system. Sometimes I even go through it myself.  My conclusion? Most, if not all public healthcare systems are broken and drowning in red ink.

I could cite hundreds of examples– the English cancer patient who had his treatment cancelled 48-times in a row; the 25-week waiting period for heart surgery in Sweden; 2-3 year waiting period for simple blood tests in Canada; Cubans dying waiting in the emergency room; Hungarians who have to bribe their doctors for treatment.

The Italians, who run their budget deficit into the ground to pay 10% of GDP in annual healthcare costs, are routinely congratulated by the World Health Organization for quality healthcare… the WHO, of course, is the crack squad of bureaucrats that spent weeks laboring over whether or not to call the H1N1 outbreak a ‘pandemic.’

Meanwhile, the Italian government is in debt over 100% of GDP with an annual budget deficit equal to its healthcare costs. They can’t afford it, and they can’t find anyone to loan them the money to keep it going anymore.

The United States will not be able to afford its healthcare either, notwithstanding the extra ’surtax’ that the government plans on pinning to the wealthy.  Even the concept of a national surtax is ludicrous– ‘wealth’ varies from place to place.

The $350,000 cut-off for the healthcare tax buys a different standard of living, depending on location; $350,000 is an enormous income in Houston, TX.  In New York City, after-tax, it barely pays the rent.  This is [one of] the same problems with minimum wage, but we won’t go there right now.

I would invite any member of Congress who thinks that the government can efficiently run a national healthcare system to take a tour of any VA hospital in the United States– you know, those places where doctors exposed 10,000 veterans to HIV and the hepatitis virus, and where they routinely botched radiation treatments to cancer patients…

Similarly, waiting lists at VA hospitals can take years… and I can attest from personal experience.  I simply cannot begin to imagine the disastrous inefficiency that will ensue when a national health plan, that no legislator has actually read, is rolled out across America…

In the words of Canadian Supreme Court Chief Justice Beverly McLachlin wrote, “access to a waiting list is not access to healthcare.”

Now, before you eat me alive and tell me that private insurance companies in America are corrupt and perverse, let me cut you off at the pass and tell you that I am inclined to agree. Insurance companies are in business to make money, and they generate the most profits by taking in the highest premiums paying out the fewest claims.

Naturally, the interests of the insurance companies are at odds with the patient.

I am a firm believer that the best and highest value in any situation can be created when interests are aligned. This is why the existing private system is a flawed solution (though a slightly better one than a public system).

So what can you do about it? How can you align interests with your healthcare provider?

Internationalize. Establish direct relationships with hospitals and physicians.

Because I travel so much, people often ask me what I do when I get sick… simple: hope like hell I’m not in the United States.  In Panama, I have a variety of doctors’ personal mobile phone numbers. We are on a first name basis, and I have no problem calling them on Sunday night if I need anything.

My experiences in private Panamanian hospitals have been fantastic. I took a friend to get a full body work up including X-rays, multiple consultations, and pharma… total price tag? Less than $100.

My friend and partner Matt has a heart surgeon on speed dial during the time of year he lives in Buenos Aires; the doctor makes house calls for 150 pesos ($39) to take care of the kids…  a heart surgeon for $39.

More on healthcare in future missives; I would like to open this up to discussion as I’m sure you have personal experiences… please comment to share.

You probably know the story of the boiling frog.

The premise is simple.  If a frog is placed in a pot of water that is already boiling, it will immediately sense danger and jump out, relatively unscathed. If it is placed in a pot of cool water, the frog will happily stay in the pot while it is slowly heated to a boil.  By the time the frog realizes the danger, it is too late.

The metaphor is used to describe how society is allowing itself to be slowly boiled– small changes that go unchallenged will lead to imminent danger.

History has seen plenty of examples– everyone always cites Nazi Germany or Rwanda, but there are countless others that don’t involve fascism or genocide.  I think today’s Argentina illustrates this point clearly.

After that country’s 2002 economic collapse, Argentina’s legislative assembly granted extraordinary power to the president on the grounds that unprecedented times call for unprecedented measures.

Seven years later, the president is still holding on to those powers, and usurping even more.  The federal government completely dominates Argentina’s economy, either directly through shareholder control, or indirectly through regulation.  Government sponsored thugs execute a mafia-like grassroots agenda, and now the government is seeking to limit the voice of what little free press remains.

The moral of Argentina’s story is simple: the greater the power given to the government, the less likely they will ever relinquish it.

In the United States, the growing tide of government power over the last decade has been equally disturbing.  Each passing bill– the USA PATRIOT Act, the Emergency Economic Stabilization Act, etc. raises the temperature in our collective pot of water by a few degrees.

One by one, some frogs are wising up and are starting to jump out

I find the recent morass to be especially boiling. The CFTC, under the spurious motive of protecting the people, has announced hearings to discuss limiting oil speculation… this is the first step in price controls, and methinks corn and wheat cannot be that far behind.

Further regulatory developments include a proposal coming from the FDIC to limit the size and scope of commercial banks. Comrade Bernanke has endorsed the idea, indicating that it is ‘legitimate’ to artificially restrict the growth and profitability of a private enterprise.

And now we have, within the last few days, the economic luminaries on Capitol Hill unveiling a special tax on the nation’s top earners to pay for the 1,000+ page health care bill… that no one has actually read.

Without even a cursory understanding of the bill, Congress is proposing to legislate the majority of Americans into health care by legislating a minority of Americans out of their wealth. Perhaps the ’stimulus surtax’ will follow close behind.

Is it getting warm yet?

As a casual outsider who has checked out of the nation-state system, I find myself curiously peering inside from time to time wondering about that boiling point… what will it take for people to finally realize the peril that they are in?

It’s clear to me that subscribers to this letter are a cut above. You are a thinker who will keep working to improve your personal lot in life despite the foolish behavior of politicians.  But each of us has a breaking point… a point where we, like Howard Beale in the film Network (clip below), decide that we’re just not going to take it anymore.

What’s your breaking point?  I’d like to know.  Make your voice heard by commenting below.

Argentina is still doomed.

If you don’t know Argentine politics well, I’ll give you a quick history: the country has vast natural resource wealth and was once one of the richest in the world. It has been serially run by a group of incompetents ever since the Perons first came to power after World War II.  After years of military dictatorship, several revolutions,  and a crippling financial crisis, Argentina has never regained its status as a stable, developed nation.

The current president of Argentina is Cristina Fernandez Kirchner, wife of her predecessor Nestor Kirchner.  The couple has been in power since 2003 and has been extraordinarily effective at consolidating power at the federal executive level.  They are among the most anti-market leaders in the world whose policies have continued to waste and squander Argentina’s natural wealth.

This past weekend, Argentines took to the polls (which, by the way, is cumpulsory for Argentine elections).  Similar to the US mid-term elections in 1994 and 2006, the people grew tired of the ruling party and cast them out.  Cristina’s party was soundly defeated– even her husband, a former president, lost his bid for a congressional seat.

While Argentines clearly voiced their dissatisfcation, nothing will change.

The problem with Argentina is not the Kirchners, or even the long history of criminals who ran the country before them.  The problem with Argentina is Argentines.

I have spent a great deal of time there and agree wholeheartedly with Governor Mark Sanford– the women are beautiful and it is full of natural splendor… great place to visit. But I’m worried about the future of Argentina, so with few exceptions, I don’t think it is a great place to live permanently– especially considering the nearby alternatives that I will be discussing in future letters.

While there are certainly plenty of individual exceptions, Argentines as a collective are fatalistic and inefficient. More importantly, though, they are unwilling to take personal responsibility for problems and blame the government for negative outcomes. This is perhaps human nature but is more acute in Argentina, and in Buenos Aires in particular.

Argentines have revolution flowing in their blood; they are intolerant of their politicians and in years past installed a new leader every other Tuesday. They think it nothing to take to the streets and demand resignation, revolution, or just plain ole’ handouts (real change is spare change, after all)… and yet each president was more incompetent than the previous.

Sure, the Argentine government is terrible– but it is the great scapegoat of the Argentine people; rather than take personal responsibility to change their own behavior and improve their own lot, Argentines as a culture will collectively bemoan government policy.  Naturally, the situation never improves because the people never look inward.

What makes a country great, wealthy, and competitive is not related to its government, but to its people.  Despite its communist, centralized government, China prospers because its people are industrious and thrifty. They work hard and save their money.  Argentines don’t come to work when it’s raining outside.

I’m convinced that Argentina is going to experience another revolution, and this will affect mostly Buenos Aires province.  Their economy will likely continue to deteriorate, and I doubt Cristina has the capacity to survive.  Unlike Honduras where the present coup is political in nature, Argentina’s will be economic and likely result in substantial instability in Buenos Aires… remember, these are the people who set the trains on fire last year because they weren’t running on time.

Bottom line, regardless of a change in political parties, I would not invest in Buenos Aires at this time; Argentine bonds have surged in recent days, and I consider this to be ignorant optimism and worthy of a short position.

I’d like to find out from readers who have been to Argentina– what are your thoughts on the government and future instability? Add your comments.

“NO Viet Cong ever called me nigger.”

Mohammed Ali’s controversial words succinctly expressed his conscientious objection to the Vietnam War. More importantly, though, his words underscored a critical point– the free-thinking individual does not necessarily share the same enemies as his government.

To this day, I cannot recall a single Cuban who has volleyed harsh word or deed against me… so despite the US government’s nonsensical, ongoing diplomatic war against its island neighbor, I decided to go see the country for myself to see how bad a centrally planned economy can be.

Yes, until His Eminence decides to lift the travel ban, going to Cuba is breaking the rules in most cases for American citizens… of course, so is riding a bicycle without a helmet and walking your dog on the beach.

———- Advertisement ———-
“Absolute theft of the Treasury.” — Denver Post

Most people know nothing about a unique Federal law created solely to let the American public take ownership of some of the most valuable Federal gold reserves, for just a tiny fraction of the market value.

“I’m set for life,” says 66-year-old Frank Mezzello who used this secret to pay just $150 for more than $400,000 worth of “government gold.”

Click here for more…
—————————————

Getting there can be cumbersome. Some people fly to the Bahamas from the US, then pay cash for a puddle jumper to Havana on the Cuban airline. Given my impression of how poorly things are run on the island, however, the better option would be to take a Latin American carrier like Mexicana or Taca.

As I happened to already be in Panama for a business dinner on Friday night, I decided to hop a flight on Copa Airlines, which offers nonstop service from Panama City to Havana for about $250.

Even at the airport in Panama you get the impression that you’re doing something bad. The immigration officials at Panama’s Tocumen airport do not stamp your passport, essentially eliminating the official trail that you ever left the country.

The same is true upon arrival to Cuba. After a short 2-hour flight to the Jose Marti International Airport in Havana, I arrived to find professional, discreet, English speaking Cuban immigration officials who slid my unstamped passport across the desk as if we were both parties to a secret drug deal.

My curiosity grew.

The ride into town from the airport was surreal; the poverty level is so overwhelming, there are few cars on the road. Traffic is nonexistent. The handful of cars that still run are all owned by the government and at least 50 years old.

Billboards on the sides of the road still praise the virtues of the communist revolution, including “United, productive, and efficient,” and “We live in a free country…”

I wondered out loud… does anyone still believe this crap?

I would find out over the course of my trip that the answer is resoundingly N-O.  But Cubans are too afraid of their government to do anything but tow the line in public.  Castro’s regime has effectively castrated Cubans’ ability to prosper; most Cubans get by on less than a dollar a day, and their interaction with foreigners is monitored and restricted.

For example, I was approached by an enterprising teenager on the street who wanted to introduce me to some women– this is quite common in Cuba.  Nearby police saw him talking to me and almost took him to jail until I intervened and explained that I was just asking for directions. My new friend told me later that the usual punishment is 30-days in jail… and Big Brother is always watching.

Most locals are so scared they would not even make eye contact with me. Those who had to interact with me—hotel workers, for example, were courteous but impersonal. It was only in very private settings that many of the locals I met were able to open up to me about their lives.

Despite their collective poverty, those who are lucky enough to have relatives in foreign countries receive regular remittances, or even gifts like apparel, DVD players, mobile phones, and satellite radio.  The youth, in particular, all seem to have designer jeans and access to the latest trends, even though many live in houses without electricity.

Most buildings in Cuba are run down, and they are all owned by the government, or at least in partnership with the government.  There are a few notable exceptions like the Hotel Nacional and the Hotel Saratoga, but by and large the government has figured out how to screw up what could have been one of the most architecturally beautiful cities in the world.

Very little about Cuba is cheap… and what is inexpensive is still overpriced for the value. Most hotels and restaurants are of notoriously poor service and quality, even though I found myself spending as much as I would in Miami.

Part of the problem is the Cuban government’s tightly controlled monetary system; Cuba has two currencies, an internal currency for locals and an external currency for foreigners, known as the “Cuban Convertible Peso (CUC).”

Although the CUC is officially pegged 1:1 with the US dollar, dollar holders are charged a 20% surcharge when they change their money into CUC; thus, $100 only buys 80 CUC, which is enough for dinner and a few drinks… not exactly a screaming deal.

Moreover, US based credit cards are not accepted in Cuba. If you do not have an overseas bank account, you will have to deal exclusively in cash… and losing 20% off the top can certainly dig into the budget.

Mobile phones don’t work either– AT&T and Sprint obviously do not have roaming agreements with the Cuban government, and given the limited availability and functionality of internet on the island, it doesn’t take long to feel cut off from the outside world.

Despite the cost and inconveniences, Cuba is an absolutely rich and alluring place that I would highly recommend for a couple of days, though any trip there needs to be properly planned.  I have much more to say about Cuba– culture, investment insights, etc. and I will detail these in a future missive.