August 19, 2009
(Interviewed by Louis James, International Speculator)
L: Doug, we’re getting a lot of questions from readers on how to follow your advice to diversify assets, politically. I know it’s a prickly subject, but what can you tell us about getting our money out from behind the new iron curtain that seems to be descending?
Doug: First – and I can’t stress this enough – you’ve got to accept the grim reality of impending currency controls. The modern era of foreign exchange controls really started with the perversely Orwellian-named Bank Secrecy Act of 1970. For the first time, that made it obligatory for U.S. citizens to report any foreign bank or brokerage accounts they had to the government.
But the threat is older than that, of course, going back to 1933, when Roosevelt confiscated Americans’ gold. Interestingly enough, only gold bullion held by Americans within the United States was confiscated. If you had gold outside the United States, you were insulated.
L: I didn’t know that – if history repeats itself, that could be a key tactical factor for our readers to consider.
Doug: Yes. There are no guarantees, of course. Those in government today think they can do absolutely anything they deem necessary and expedient. But at least if it’s out of their physical bailiwick, it improves your odds.
L: Why do you think they allowed that exemption last time? I doubt it was because they had any shred of respect for private property – maybe they just recognized that trying to seize gold overseas would be impractical.
Doug: Good question. Well, the 1930s were a different era. Communication, for one thing, was vastly slower and more expensive than it is now. And you have to remember that though we had an income tax in the 1930s, since 1913 actually, very few people were paying it – even among those allegedly legally obligated to pay it. It was hard for the government to find out who they were, and how much they were earning, and so on. Even though there were only 140 million people in the country then, the absence of computers, and much less centralization, made it very hard for Washington to keep tabs on them.
L: The income tax really was a voluntary tax back then!
Doug: [Laughs] Much more so than now – it really was a different era. At any rate, based on this history, and that the juggernaut is building momentum towards the bottom of the ditch, I have to reiterate my advice on the most important investment decision you can make. And it isn’t one among the different classes of investment; it’s political and geographical diversification. Simply put, that’s because no matter where you live, your government is the greatest threat to your wealth today.
If you’re a high-income earner, the state basically takes 50% of what you earn, and then from what’s left, you have to pay your real estate taxes, sales taxes, and many, many other kinds of taxes. Government is without question the biggest danger to your financial health. You’ve got to diversify your assets so they are not all under any one government’s control.
L: You say that in almost every speech you give these days, and you said it in one of our interviews a couple weeks ago.
Doug: Yes, and it bears repeating, constantly. It’s the elephant in the room that very, very few people pay any attention to, and it’s going to stomp most people to death, for just that reason.
L: Okay, so give us a primer. For those who want to avoid getting crushed by the elephant, where do they begin?
Doug: To start with, it makes all the sense in the world to have a foreign bank account. Not a hidden one – I’m not advising anyone to break any laws. You report it on your annual tax filings. So, the government will know about it, but if it’s a foreign bank account, they can’t just step in and lock down your assets in an instant.
L: Does Canada count as a foreign country for Americans?
Doug: I’ll probably get hate mail for saying so, but it’s important for investors to recognize that Canada is a sort of “USA-Light.” When Washington says, “Jump!” Ottawa says, “How high?” Nonetheless, if only for the sake of formalities and legal pleasantries, U.S. citizens would have some degree of insulation with a Canadian bank account. And, as a general rule, Canadian banks are more solvent than U.S. banks, so setting up a Canadian bank account is an easy first step for many U.S. investors.
The second thing to do would be to set up a Canadian brokerage account. Unfortunately, the SEC has made it so that no Canadian broker will open an account with an American unless they have a U.S. subsidiary. That, in effect, makes your Canadian brokerage account like a U.S. brokerage account. That doesn’t help you much from an asset protection point of view, but it does let you trade directly in many of the stocks we recommend in the International Speculator and the Casey Energy Report (not through a U.S. market-maker via the pink sheets).
Third, I think that having a safe deposit box in Canada is vastly preferable to having one in the U.S. You probably do remember that when Roosevelt confiscated gold in 1933, he also sealed safe deposit boxes in all U.S. banks. No American could visit a safe deposit box for some time without a government agent accompanying him. That could certainly happen again.
And all of this is true in other countries around the world.
But yes, as an easy place to start, Canada is a sort of plain-vanilla jurisdiction that’s worth giving a try.
L: So, what would be the French vanilla, or even the Bailey’s Irish Cream jurisdiction? Is there such a thing as a tax haven anywhere in the world anymore? Even the Swiss have caved… I just heard that they just started handing over new account info to U.S. authorities.
Doug: Yes, apparently there were some 50,000 accounts UBS had, owned by U.S. citizens. UBS, a multinational bank with a very substantial presence in the United States – and therefore exposure to extortion by U.S. authorities – was going to hand them all over. The Swiss government stepped in, saying they would prosecute UBS officials if they violated Swiss law by doing that. But the Swiss worked out some sort of compromise with the U.S. authorities, so only about 5,000 accounts are being handed over. On what basis they picked these 5,000 is uncertain.
So, the first tax haven rule is to never go to a place that’s obviously a tax haven. If I were interested in bank privacy, I’d forget about places like the Bahamas or the Caymans. It makes no sense at all today. All those little island republics are totally under the thumb of the U.S. at this point. And they’ve always been infiltrated with stooges. They may have bank secrecy laws, but they don’t have a tradition of privacy like Switzerland has – although that’s no longer what it was.
You’ll recall how the German government bribed a Liechtenstein banker to steal account names and information. The Germans then turned over relevant data to the UK, U.S., and other governments, who were quite happy to receive stolen goods. And there was about zero protest over the appalling theft. It’s a testimony to how thoughtless and ethically complacent most people are; when a state commits a crime, they just overlook it.
L: Are you saying that all of the little havens are unreliable?
Doug: Well, I don’t know of any that are reliable.
Instead, I would recommend places that are geographically distant from the U.S. – and culturally distant as well. To me, the best places to be are in the Orient. That’s partially because the Chinese, and other oriental civilizations, are much less prone to roll over and do what they are told. National pride assures that, if nothing else.
But if you go this route, with, say, an account in Hong Kong, you certainly would not want to use a bank like HSBC. It’s got branches all over the world, prominently in the U.S. – so, like UBS, they’ll do what they are told.
Actually, there are still Swiss banks that will open an account for a “U.S. person,” if you can convince them to do it. But you definitely do not want a Swiss or Liechtenstein bank that has any presence in the U.S. The same would be true in the Orient – so forget about HSBC. You want a real Chinese bank. That way, when the U.S. government calls, the phone will be answered in Chinese and no one will speak English with them.
The best places are the least obvious places. Malaysia is interesting. Thailand. These are completely non-tax haven types of places – and that might make them suitable.
L: What about step two, getting a brokerage account?
Doug: Well, it’s tough these days. If you want to trade in U.S. and Canadian stocks., you pretty much have to have an American or Canadian broker. But one thing that can be done that is completely legal (and reportable) is to open up a foreign company. Then the company can open up a brokerage account. That way, you do have a level of insulation I think is very valuable, both from a practical and a legal point of view.
L: I gather you’re not talking about the Banana Republic IBCs I see peddled on the Internet?
Doug: Right. Most of what you see on the Internet offering to open up an IBC – which is just an offshore company – are just scams, if not stings. The fees are too high. The people are usually sleazy. They often come up with all sorts of cockamamie tax-avoidance schemes. You may be encouraged to do things that are illegal. They are just disasters waiting for you to walk into. I strongly encourage people not to even consider such offerings.
If you want an offshore company for the purpose of convenience or a measure of privacy, completely reportable and within the law, the best thing to do is to go to the jurisdiction you’ve picked and see a lawyer who deals in that sort of business. Cut out the middleman. Ideally, the jurisdiction would be one that meets the criteria I outlined above, but is also a place you’d actually enjoy spending time in.
L: So, you hop on a plane to, say, Panama, and… how do you go about finding a reliable attorney to set up your corporation?
Doug: That’s the intelligent way to do it. There’s nothing illegal, nor particularly tricky about it; you just find a lawyer who specializes in it, pay the fees, and off you go.
How do you find a good lawyer? Same way you do at home; you go and start interviewing lawyers until you find one that impresses you as being sound.
Panama, by the way, is probably the best place to do this at this moment. The British Virgin Islands may be another. And, of course, if you’re an Australian or a New Zealander, you should think about Vanuatu – it’s only a two-hour plane ride from Sydney or Auckland.
Back in the Western Hemisphere, the only other reasonable alternative I see is Uruguay. It’s always been promoted as the “Switzerland of South America” – and there’s a lot of truth to that. Uruguay is a small country, about the same size and with the same-size population as Switzerland, and a very big part of their national income is foreign banking. They have no tax on foreign-earned income – though, unfortunately, they recently instituted a tax on domestic-earned income. Too bad.
Another unfortunate thing about Uruguay is that when you import gold there – such as by carrying Krugerrands in your briefcase – their customs form asks you to report it. It’s not against the law, but for some ridiculous reason, they want to know.
L: That’s really all it takes? Find a lawyer and pay the fees?
Doug: Yes, though there can be nuances worth paying attention to. For example, there are various jurisdictions with different tax treaties that can be used to your advantage. The Dutch Antilles being a famous example, as far as dividends treatment goes. This is a specialist area that, well, you should discuss with a specialist. But you should definitely give it some thought.
Oddly enough, you can import gold into Argentina with no problems nor reporting requirements, and you can buy and sell gold in Argentina just as easily. It’s much easier than in Uruguay, but I wouldn’t dream of doing any significant banking in Argentina – and neither do Argentines. The government is just completely untrustworthy when it comes to things like bank accounts.
So, it’s rather perverse; you can deal easily in gold in Argentina, but not bank accounts, and you can’t deal in gold easily in Uruguay, but bank accounts are easy.
Frankly, the best place to look for one-stop financial services shopping is Panama. Banking is easy, and there’s no gold reporting.
And yes, you can still take gold in and out of the U.S. without reporting it. It’s like stamps or rare coins. The exception would be, if you had enough of them, to remember that Double Eagles have a face value of $20, and the new Eagles have a face value of $50.
L: What about your cash, once you have your offshore bank account set up? You have to declare it if you take more than $10,000 on your person, but can you wire whatever you want?
Doug: Yes, you can send any amount of money you want, currently. It gets reported, but it’s basically unregulated. And by the way, the $10,000 limit doesn’t cover gold, but it does cover stock certificates and other financial instruments – but you can still send those by Federal Express.
L: I wonder how long that will last…
Doug: I’m sure they’ll get ‘round to closing all the loopholes. So, the time to act is now. We’ll keep monitoring the situation in The Casey Report, but when this happens, the Powers That Be won’t want anyone to see it coming, so it will zing in from left field. Your only chance to protect your wealth is to start diversifying its exposure to any one particular predatory state as soon as possible.
We’ll talk more about foreign currency controls next week, but I have to stress again the urgency of diversifying the political risk your assets are exposed to: do it now.
L: Okay, Doug – thanks!
Doug: You’re welcome.
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August 26, 2009
(Interviewed by Louis James, International Speculator)
L: Doug, we talked last week about getting assets out of your home country, especially the U.S., where to take them and what to do with them. In so doing, you touched on the inevitability of currency controls just ahead, especially for Americans. Can you tell us more about that?
Doug: Yes, I’m quite serious about what I said about “the grim reality of impending currency controls.” As the global economy continues to deteriorate, governments will have to appear to be “doing something.” It’s going to become very fashionable to institute some sort of foreign exchange control.
Why might that be? Because obviously, people who are taking their money out of the country are unpatriotic…
L: Those bastards.
Doug: That’s right. Jingoistic Americans naturally, but stupidly, see taking money out of the country as being unpatriotic. They don’t understand that it’s mainly those prudent people who will be able to supply the capital to rebuild a devastated economy later. Besides, getting money abroad is obviously something that only rich people would do… and of course, it’s time to eat the rich, as well. For those two reasons, there won’t be much resistance to controls. And the state gets to appear to be “doing something.”
And when they do, more people – at least those with any sense – will get scared and really try to get their money out, which will exacerbate the run to the exits. The bottom line is that if you want to get your money out, the time to do it is now. Beat the last-minute rush.
I don’t know what form the exchange controls are going to take, but there are two general possibilities: regulation and taxation.
The regulations might take the form of a rule prohibiting you from taking more than X-thousands of dollars abroad per year without special permission. No expensive vacations, no foreign asset purchases without state approval.
As for the taxation, if you want to, say, buy foreign stocks or real estate, you might have to pay an “Interest Equalization Tax” or some such. So, you could do it, but it’d cost you a lot of money to do it.
Something like either of these, or both, is definitely in the cards.
L: But aren’t FX controls something from the past? I mean, where do they exist today?
Doug: Well, FX controls have been used since the days of the Roman Empire. A country debases its currency, raises taxes beyond a certain level, and makes regulations too onerous – and productive people naturally react by getting their capital, and then themselves, out of Dodge. But the government can’t have that, so it puts on FX controls. They’re almost inevitable at this point.
Almost every country – except for the U.S., Canada, Switzerland, and a few others –had them until at least the ‘70s. I remember leaving Britain once in the ‘60s, and a border guy searched me to see if I had more than 50 pounds on me. In those days currency violations in the Soviet Bloc countries could get you the death penalty. Things liberalized around the world with Reagan and Thatcher, and then the collapse of the USSR. But you have to remember that that was in the context of the Long Boom. Now, during the Greater Depression, things will become much stricter again.
Right now, the U.S. just has reporting requirements. But some places, like South Africa, make it very expensive and inconvenient to get money out. South Africa, perversely, may serve as a model for the U.S.
L: Okay, so, we talked last week about Americans at least setting up a Canadian bank account and safe deposit box, and better yet going in person to Panama, Uruguay, Malaysia, or a similar place to do the same. And once there, you advised getting with a lawyer, either referred by someone you trust or found through an interview process, to set up a corporation that can handle your assets and investments for you. This all needs to be reported but it’s wise to do it in advance of the higher costs or other limitations to come.
Doug: Yes. While U.S. persons must report foreign bank and brokerage accounts, safe deposit boxes are not – at least not yet – reportable. This leads me to the biggest and best “loophole” when it comes to potential foreign exchange controls, and that’s foreign real estate.
I’m of the opinion that, broadly speaking, real estate as an asset class is going to be a poor performer for a long time to come – but that won’t be equally true across all countries. Real estate in countries that rely on mortgage debt to buy and sell will continue to be the worst hit.
People don’t understand that buying property with a mortgage is just the same as buying stocks on margin. It’s caused speculative bubbles and malinvestment. Until the malinvestment in those countries is entirely liquidated, you don’t want to invest in real estate in them. But a lot of countries, especially in the third world, have no mortgage debt whatsoever. Zero mortgage debt. You want a piece of property, you pay for it in cash. That keeps prices down and the market much more stable. And it makes for more interesting speculations, because if a mortgage market develops in the future, it could light a fire under prices.
But, from the viewpoint of FX controls, the nice thing about real estate is that there is no way they can make you repatriate it. Other than owning a business abroad, real estate is the only sure way to legally keep your capital offshore.
L: I suppose it would be difficult for even Uncle Sam to seize your estancia in Argentina… not without starting a war.
Doug: Yes. Although I don’t doubt he’ll be starting more wars as well… [Laughs]
L: So, part of your thinking here isn’t just speculative. You’re talking about strategies for wealth preservation, not just in the face of foreign exchange controls, but more aggressive, predatory taxation and confiscation by the state – they can seize your assets, even real estate, in the U.S., but not abroad.
Doug: Exactly. Argentina is excellent from that point of view; rights to real property are, if anything, better than those in the U.S. In many ways, Argentina is culturally and demographically more like Europe than Europe. Uruguay is also excellent, although culturally it’s like a backward province of Argentina. Paraguay is quite secure – but a bit weird as a place to live.
I’m not currently up-to-date on the Chilean real estate market, but Chile is definitely now the richest and most advanced South American country, and an excellent choice. Brazil is fine. Colombia is improving greatly. Ecuador has a goofy president, but parts of it are very nice, and it’s about as cheap as Argentina. Eastern Bolivia is interesting, actually, despite Morales. Only Venezuela is out of the question in South America – but Chavez won’t last forever. It’s just a pity they have all that oil, which is always a corrupting influence.
L: Well, then, what about Central America? I know you prefer South America for speculative purposes, but what if someone wants to park a lot of wealth by buying a couple miles of beautiful beachfront property in Costa Rica, or some place like that?
Doug: I was a big fan of Costa Rica for many years… The first time I went down there was 35 years ago – but it’s a different place now. Then, it was very cheap, and now it’s very expensive. And it’s totally overrun with gringos. So, Costa Rica is not of that much interest to me at this point; it’s pleasant, but there’s limited upside.
I think an excellent place to be in Central America is Belize. Although culturally and ethnically, it’s not really part of Central America; it’s part of the Caribbean.
L: And they speak English there.
Doug: They do indeed, though things are changing. The Guatemalan government has always regarded British Honduras, which is what Belize used to be called, as part of Guatemala. There have actually been confrontations between Britain and Guatemala over this. But that’s in the past; now there’s a different problem. Guatemalans are rolling over the border in much the same way that Mexicans are in Texas, New Mexico, Arizona, and California.
So, the character of Belize is changing, but for the foreseeable future, it’s still going to be Belize, and I rather like it. Aside from Panama, Belize would be my first choice in Central America.
The problem with Central America, however, is that it’s a bunch of small countries that have historically been very unstable. And culturally backward. Most are under the thumb of the United States… there’s a long history of U.S. invasions, most recently in Panama with Noriega. There are Frito Banditos running around these places…
The most culturally advanced country in Central America, not counting Mexico, of course, since it’s in North America, is Guatemala. But Guatemala has had huge troubles with violence, which has only recently come to an end… I hate going through checkpoints at night, manned by jumpy, uneducated, heavily armed teenagers.
Nicaragua is the low-cost alternative, but it’s relatively backward. Panama is probably the best choice. It’s very international, very urban (in Panama City), and it’s very sophisticated, infrastructure-wise.
If I didn’t like Argentina and Uruguay so much, I would put Panama at the top of my shopping list.
L: Got it. Back to the exchange controls themselves. Do you think people will have any warning at all? It seems to me that this is the sort of thing the Powers That Be would want to spring on people.
Doug: I think it’s going to come out of left field. It always does, with at most an official denial just before it happens. In August 1971, Nixon devalued the dollar, which immediately dropped against gold and all foreign currencies. I think there’s a reasonable probability that the government will do that again. Gold may not be part of the equation, but they may decide to put in some sort of fixed exchange rate between the dollar and various foreign currencies.
The reason for thinking this is simple: with all the dollars outside the United States devalued by that much, that much of a liability just vanishes into thin air. And in the short term – it’s never a long-term fix – U.S. exports would go up. This would “stimulate” the domestic economy. Imports to the U.S. would go down, which would make for fewer dollars leaving the U.S. and adding to the $7 trillion overhang the U.S. already has.
L: I know you hate making predictions, but can you tell us if your “guru sense” is tingling on this so strongly that you think it could happen this year? Or is this more of a 2010 possibility? 2011?
Doug: The timing on this is really unpredictable. These people don’t have a plan. They’re acting “ad hoc” to whatever seems most urgent. All the so-called “economists” around government today are really just political hacks. Their world views are totally unsound.
If you don’t believe me, check out the YouTube video of the clueless chief inspector of the Fed that’s circulating on the Internet. (See:http://www.youtube.com/watch?v=PXlxBeAvsB8)
L: With all the problems the U.S. has, do you think this could happen now? Could we be reading about new exchange controls on CNN.com this afternoon?
Doug: Sure. Although they typically pull these stunts over a weekend. I expect something of this nature to happen any time between tomorrow morning and two years from now. If some form of currency controls are not instituted within two years, I’m going to be genuinely surprised.
So, if you’re going to take action, you should start heading for the exits now. Not next month, and certainly not next year.
L: For those who don’t take action until it’s too late, under the scenarios you mentioned, they’ll still be able to get money out. It’s just that it might be more difficult, time consuming, humiliating, and certainly more expensive to do. For every $100,000 they move, only $90,000, or $70,000, or whatever will get to where it’s supposed to go. Can you foresee a more Stalinesque alternative, where they simply can’t get anything out at all?
Doug: Hopefully not. Anything is possible, and things can change so rapidly… but I’d hate to think of what conditions would be like if they ever became that draconian. It’d be so bad on other fronts that there would be all sorts of even more urgent things on your mind – Americans would get a very quick and unpleasant education in the real meaning of Maslow’s hierarchy.
L: Like the Mad Max-style neobarbarians at the door with a battering ram.
Doug: Exactly – that’s when you’ll definitely want to be in more pleasant climes. I’d want to be watching it on my wide-screen, in comfort, not out my front window.
L: We’re talking about extremes here…
Doug: You know, back in the 1970s there was a spate of books published on financial privacy. In those days, financial privacy was still possible. Now, it’s not only no longer truly possible, short of embracing a completely outlaw lifestyle, it’s very dangerous to write about it or even talk about it. I kid you not. These days, people who ask too many questions about privacy techniques may well be government stooges…
There’s lots of handwriting on the wall. All those books on financial privacy were published in the ‘70s – if you look on Amazon, you can still find them. But there’s nothing really worth reading that’s been written on the subject in 20 years. It’s actively discouraged by the government. I could name – but I won’t – at least two authors that got themselves into a real jackpot this way. Forget about the First Amendment.
In fact, I even feel uncomfortable talking about it in this interview.
So let me once again emphasize that I advise everyone to stay fully within the bounds of the law.
That’s not for moral reasons, of course; there is no morality to the law. It’s strictly for reasons of practicality. Risk-reward ratio.
L: Understood. Loud and clear. Any more investment implications, besides foreign real estate, that you want to draw attention to here?
Doug: Yes – and it’s another reason for those so very clever boys in Washington to embrace currency controls. They will be disastrous for the U.S. economy, but there’s a very good chance that, in the short run, they’ll be very good for the stock market. That’s partly for the reasons I already mentioned about it temporarily boosting U.S. exports, and hence earnings of U.S. exporters, but also because all that money that can’t leave the U.S. will have to go into something.
Investors will probably want to put it into equity, rather than debt, while the dollar is depreciating. Again, it’s disastrous over the long term, but as a short-term play, buying the blue chips the day the exchange controls are instituted could be a good move.
L: You’d buy the Dow?
Doug: I might, if I couldn’t think of anything more intelligent or original to do. We’ll just have to see what the situation is like.
L: This will be a development we’ll have to keep an eye out for in The Casey Report, then.
Doug: Yes, we will. The more politically controlled an environment, the more distortions are created. And the better it is for a speculator.
L: Thanks again, Doug – you’ve given us a lot to think about.
Doug: My pleasure.
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