At a time when overindebted governments are making increasingly desperate grabs for their citizens’ money, keeping all your assets invested in one country—and denominated in one currency—is a very bad idea.
Image courtesy of Gordon T Long
A vitally important question for you
Do you have a bank account in another country? If not, you should hurry up & get one.
Holding foreign currencies in an account outside of the United States is the way to go if you REALLY want to diversify your assets internationally—but in the last few years the US government has left no stone unturned to make it harder for investors to get a foreign bank account. It’s not too late, though—there are still feasible ways to open one. But you have to act quickly, before Washington enacts even stricter controls in a desperate grab for your money.
Most people know of the general investment benefits of not having all your asset eggs in one basket. This portfolio-diversification concept—investing in multiple asset classes—also applies to the political risk associated with your home country. It is a risk few people think about diversifying.
In short, internationalization is prudent because it frees you from absolute dependence on any one country. Achieve that freedom, and it becomes very difficult for any country to control you.
While diversifying political risk is something that everyone in the world should strive to achieve, it goes double for those who live under a government that is sinking deeper into fiscal trouble (e.g., most Western governments).
Here are a few compelling arguments on why you should diversify, diversify, diversify—across different countries, exchanges, currencies, banks, and asset classes.
1: IMF Endorses Capital Controls
Bloomberg reported that the “IMF has endorsed the use of capital controls in certain circumstances.“
“In a reversal of its historic support for unrestricted flows of money across borders, the IMF said controls can be useful…”
2: There Is Academic Support for Capital Controls
Harvard Economists Carmen Reinhart and Ken Rogoff suggest debt write-downs and ‘financial repression’, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens.
3: Confiscation of Savings on the Rise
The IMF, in a report entitled “Taxing Times,” published in October of 2013, on page 49, states:
“The sharp deterioration of the public finances in many countries has revived interest in a capital levy—a one-off tax on private wealth—as an exceptional measure to restore debt sustainability.”
A study from the IMF: The tax rates needed to for a sample of 15 euro area countries is 10% on households with a positive net worth.
Note: The tax would apply to anyone with a positive net worth. And the 10% wealth-grab would, of course, be on top of regular income taxes, sales taxes, property taxes, etc.
4: We Like Pension Funds
Unfortunately, it’s not just savings. From a paper by Carmen Reinhart & M. Belén Sbrancia:
A subtle type of debt restructuring takes the form of ‘financial repression.’ Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.
Yes, your retirement account is now a “captive domestic audience.”
“Directed” means “compulsory” in the above statement, and you may not have a choice if “regulation of cross-border capital movements”—capital controls—are instituted.
5: The Eurozone Sanctions Money-Grabs
Germany’s Bundesbank weighed in on this subject last January:
“Countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.”
And it’s not just in Germany. On February 12, 2014, Reuters reported on an EU commission document that states:
The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis.
Reuters reported that the Commission plans to request a draft law, “to mobilize more personal pension savings for long-term financing.”
EU officials are explicitly telling us that the pensions and savings of its citizens are fair game to meet the union’s financial needs. If you live in Europe, the writing is on the wall.
Actually, it’s already under way… Reuters recently reported that Spain has introduced a blanket taxation rate of .03% on all bank account deposits, in a move aimed at… generating revenues for the country’s cash-strapped autonomous communities.
6: Canada Jumps on the Confiscation Bandwagon
You may recall this text from last year’s budget in Canada:
“The Government proposes to implement a bail-in regime for systemically important banks.”
A bail-in is what they call it when a government takes depositors’ money to plug a bank’s financial holes—just as was done in Cyprus last year.
The bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.
What’s a “bank liability”? Your deposits.
Have you considered why the Foreign Account Tax Compliance Act was passed into law? It was supposed to crack down on tax evaders and collect unpaid tax revenue.
However, the result of FATCA keeps US savers trapped in US banks and in the US dollar, where the US could implement a Cyprus-like bail-in. Given the debt load in the US and given statements made by government officials, this seems like a reasonable conclusion to draw.