Earlier this week the German government leaked a frightening 69-page memo entitled “Concept for Civil Defense.”
Citing multiple terrorist attacks, cybercrime, and a host of other threats, the report states that Germans should prepare for an event that could “threaten our existence.”
The report proposes a number of mandatory countermeasures, including that Germans should stockpile food and water.
There’s also peculiar language about “civil support for the armed forces” suggesting a possible return to mandatory military service, in addition to potential plans for emergency nationalization of food production and distribution.
We’ve received numerous emails from friends and readers in Germany asking if it’s time to “get out”.
Let’s be honest– most of the West is in the same boat right now.
Despite hundreds of billions spent on homeland security, aerial surveillance, police militarization, and spying on absolutely everyone…
… despite all the laws they’ve passed to award themselves even more authority and destroy citizens’ individual freedoms…
… western governments are absolutely powerless to stop radicalized militants who are willing to blow themselves up.
France, for example, has military troops deployed throughout the country patrolling the streets and airports as if they were in downtown Kandahar.
Yet despite so much security, some lunatic was still able to get behind the wheel of a delivery truck last month and mow down 80+ people like bowling pins.
Terror attacks. Mass shootings. Race riots. Cops killing citizens and citizens killing them right back. Radical politicians on the rise.
Plus Europe has additionally been suffering a full-blown refugee crisis that has turned into an international rape crisis.
Is it time to “get out”? Perhaps.
I know a lot of people are panicking right now and feel like they need to hit the eject button.
But just remember that emotional, fear-based decisions tend to be very bad ones.
Look at the facts and make a rational decision.
In my own case, I “got out” long ago. I’ve been an expat for over a decade, something that turned out to be one of the best choices I’ve ever made.
For the past several years I’ve been spending about half of my year here in Chile (and the other half traveling to dozens of countries, now totaling more than 120.)
Weather in Chile is spectacular, the cost of living (especially if you want to live extremely well) is shockingly cheap.
And on a slice of paradise in Chile’s warm, perennially sunny central region, I’m able to grow all of my own organic food.
In addition to a bountiful organic garden and countless chickens, pigs, sheep, cows, there’s just about every fruit and nut tree imaginable– peaches, plums, nectarines, figs, almonds, apples, pears, apricots, olives, walnuts, strawberries, blueberries, avocados, oranges, lemons, persimmons, cherries, grapes, etc.
We grow rice and wheat (which we turn into organic flour). We press our own olive oil. We have our own wine.
Plus there’s abundant renewable energy and an endless supply of water from underground aquifers.
This is all available in Chile at a tiny fraction of what you might expect it would cost.
My team was recently contacted by a producer at BBC requesting an interview for a piece they’re doing about people “living off the land.”
I thought it was entirely the wrong idea, and not really what I do.
Sure, I live in a beautiful place with abundant food, water, energy, etc.
But just because I grow my own organic food doesn’t mean I’m sitting in a bunker waiting for the end of the world to come.
On the contrary. Despite all these threats and risks in the world, I remain incredibly optimistic.
And maybe part of the reason for my optimism is that I’ve removed myself from the majority of those risks.
Of course Chile has its own problems.
But there’s no angry, hateful, disjointed, bitterly divided society with constant race riots, terror attacks, and mass shootings.
No one hijacks an airplane and threatens to kill all the Chileans.
Instead, I’m basically left alone here to live my life, which makes me feel very, very free.
* Immigration here for talented foreigners is remarkably easy; in another two years, in fact, I’ll be able to apply for citizenship and obtain yet another passport.
There’s also an abundance of opportunity in this country.
Just over two years ago, for example, I launched one of the largest agricultural ventures of its kind in the world, right here in Chile.
Our company has invested tens of millions of dollars in the country across thousands of acres of farmland, and we are now one of the largest employers in the region.
I’m sad to say there’s no way we would have been able to pull off this project in the US now given the absurd level of regulation and inflated land costs there.
But in Chile it’s possible; land and labor costs are so low that you can generate tremendous long-term returns with well-managed agricultural property.
(We’re not the only ones to figure this out– the Mormon Church and Harvard Endowment Fund are among the other foreigners investing in Chilean agriculture.)
I don’t mean to digress; the larger point here is that, yes, there are a LOT of issues to be concerned about in the West.
But the decision to leave shouldn’t be driven by fear. Make it about lifestyle and opportunity.
Chile is just one tiny corner of the world. There are boundless other possibilities. Your own slice of paradise may be out there somewhere.
After all, it’s 2016, not 1816. The technology exists for you to be able to work and generate income no matter where you are in the world.
There’s no reason to be beholden to something as anachronistic as geography anymore.
And if you do decide to stay put, at least consider a Plan B.
Where would you go if you ever did have to hit the eject button?
Don’t wait until you’re packing your bags to start thinking about it.
That was fast.
Yesterday I told you how a consortium of 15 Japanese banks had just signed up to implement new financial technology to clear and settle international financial transactions.
This is a huge step.
Right now, most international financial transactions must pass through the US banking system’s network of correspondent accounts.
This gives the US government an incredible amount of power… power they haven’t been shy about using over the last several years.
2014 was one of the first major watershed moments when the Obama administration fined French bank BNP Paribas $9 billion for doing business with countries that the US doesn’t like– namely Cuba and Iran.
It didn’t matter that this French bank wasn’t violating any French laws.
Nor did it matter that only months later the President of the United States inked a sweetheart nuclear deal with Iran and flew down to Cuba to attend a baseball game with his new BFFs.
BNP had to pay up. A French bank paid $9 billion because they violated US law.
And if they didn’t pay, the US government threatened to kick them out of the US banking system.
$9 billion hurt. But being kicked out of the US banking system would have been totally crippling.
Big international banks in particular cannot function if they don’t have access to the US banking system.
As long as the US dollar remains the world’s dominant reserve currency, major banks must able to clear and settle US dollar transactions if they expect to remain in business.
This means having access to the US banking system… the gatekeeper of the US dollar.
But having watched BNP Paribas get blackmailed into paying an absurd $9 billion fine to the US government, the rest of the world’s mega-banks knew instantly that their heads could be next ones on the chopping block.
So they started working on contingency plans.
Blockchain technology provided an elegant solution.
Instead of passing funds through the US banking system’s costly and inefficient network of correspondent accounts, blockchain technology provides an easy way for banks to send payments directly to one another.
I cannot understate how important this technology is.
Blockchain may very well be what neutralizes the US government’s domination of the global financial system.
And while there’s been a lot of momentum in this direction (hence yesterday’s letter to you), even I’m surprised at how fast it’s moving.
Today, four of the world’s largest banks announced a brand new joint venture to create a new financial settlement protocol built on blockchain technology.
Deutsche Bank from Germany, UBS from Switzerland, Santander from Spain, and Bank of New York Mellon have joined together to launch what they’re naming the very un-sexy “utility settlement coin”.
Like Ripple, Setl, Monetas, and several other competing technologies, Utility Settlement Coin has the potential to end the reliance on the US banking system for cross-border payments and financial transactions.
Banks will be able to send payments to one another directly without having to transit through the Wall Street financial toll plaza.
(Global consulting firm Oliver Wyman estimates that the cost of clearing and settling international financial transactions at up to $80 billion annually.)
This has enormous implications, especially for US banks.
The Federal Reserve, for example, has already warned that financial technology could pose stability risks to the US financial system.
And they’re right.
If foreign banks are able to transact directly with one another without having to go through the US banking system, then why would they need to park trillions of dollars in the United States?
Adoption of this technology could cause a gigantic vacuum of deposits out of the US banking system.
US banks would take a big hit. And the US government would have far fewer foreign buyers to sell its ever-expanding piles of debt.
Make no mistake, the adoption of this technology is a game-changing development with far-reaching implications. And it’s happening very quickly.
If these mega-banks can hit their milestones, they’ll launch commercially in eighteen months.
Mark it on your calendar– that may be the end of peak US financial dominance.
In July 1944, just weeks after the successful Allied invasion of Normandy, hundreds of delegates from around the world gathered in Bretton Woods, New Hampshire to determine the future of the global financial system.
The vision was simple: America would be the center of the universe, and every other nation would revolve around the US.
This arrangement ultimately led to the US dollar being the world’s dominant reserve currency which still remains today.
Whenever a Brazilian merchant pays a Korean supplier, that deal is negotiated and settled in US dollars.
Oil. Coffee. Steel. Aircraft. Countless commodities and products across the planet change hands in US dollars, so nearly every major commercial bank, central bank, multi-national corporation, and sovereign government must hold and be able to transact in US dollars.
This system provides a huge incentive for the rest of the world to hold trillions of dollars worth of US assets– typically deposits in the US banking system, or US government bonds.
It’s what makes US government debt the most popular “investment” in the world, why US government bonds are considered extremely liquid “cash equivalents”.
As long as this system continues, the US government can continue to go deeper into debt without suffering serious consequences.
Just imagine being totally broke… yet every time you want to borrow money there’s a crowd of delighted lenders eager to replenish your wallet with fresh funds.
This may be the US government’s #1 advantage right now.
You’d think that they would be eternally grateful and take care to never abuse this incredible privilege.
But no… not these guys.
In fact, they’ve done the exact opposite. Over the last eight years the US government has gone out of its way to eliminate as much of this benefit and alienate as many allies as possible.
They’ve abused the trust and confidence that the rest of the world placed in them by racking up record amounts of debt, waging indiscriminate wars in foreign lands, and dropping bombs on children’s hospitals by remote control.
They’ve created absurd amounts of regulations and had the audacity to expect foreign banks to comply.
Plus they’ve levied billions of dollars worth of fines against foreign banks who haven’t complied with their ridiculous regulations.
(Last week, for example, New York state financial regulators fined a Taiwanese bank $180 million for not complying with NY state law.)
And they’ve threatened to banish any foreign banks from the US financial system who don’t pay their steep fines.
Abuse. Deceit. Extortion. Not exactly great ways to win friends and influence people.
It’s as if Barack Obama pulled together the smartest guys he could find to make a list of all the ways the US government would have to screw up in order to lose its enormous financial privilege… and then he went out and did ALL of them.
The US government is practically begging the rest of the world to find an alternative to the US dollar and US banking system.
Even the government of France, a key US ally, called into question continued US dominance of the global financial system after the US government slammed French bank BNP Paribas with a $9 billion fine.
There have already been some attempts to displace the United States in the financial system.
China has been aggressively setting up its own competing financial infrastructure, something called the China International Payment System.
It’s been a slow start for the Chinese, but they’re building momentum. Though I’m not sure China is the answer in the long run.
While banks around the world may not care for the long and strong arm of the US government, the Chinese government doesn’t exactly inspire trust either.
But now there really is an alternative. Technology.
Ripple, a blockchain-style protocol that’s funded by Google Ventures (among others), is now being utilized by international banks to send and receive transactions directly.
The way international bank transfers work now relies exclusively on the US financial system.
Large foreign banks have what’s called a “correspondent account”, typically at a major US bank like JP Morgan, Citibank, etc.
A correspondent account is essentially a bank account for other banks. Our company holds funds at a bank in Singapore, for example, whose US dollar correspondent account is at Bank of New York Mellon.
Foreign banks’ US dollar correspondent accounts are typically at major Wall Street banks because that’s the epicenter of US dollar transactions.
So when a bank in Australia sends US dollars to a bank in South Africa, that payment actually flows from the Australian bank’s correspondent account in the US to the South African bank’s correspondent account in the US.
The entire transaction effectively takes place using the US banking system.
Again, this gives the US government enormous power over foreign banks. Any foreign bank that doesn’t do what Uncle Sam commands can be excommunicated from the US banking system.
And without access to the US banking system, a foreign bank will be unable to transact in US dollars, and hence unable to conduct any global business.
This is a death sentence for a bank. The US government knows this and has been blackmailing global banks for years.
Two months ago a Canadian financial services company sent the first-ever institutional cross-border payment to a German bank.
This isn’t some wild theory or conjecture. It’s actually happening.
Just this morning a group of 15 banks in Japan signed up to start using Ripple, and dozens of banks plan to use the protocol within the next six months.
The technology is cheaper. Faster. Superior. And it doesn’t come with any US government strings attached.
So it seems Uncle Sam may have finally shot himself in the foot for the last time.
[Editor’s note: This letter was co-written with Tim Price, London-based wealth manager and co-manager of the VT Price Value Portfolio.]
On January 30, 2000, the 88+ million viewers of Superbowl XXXIV were treated to a commercial featuring a now infamous sock puppet.
The advertisement was from a company called Pets.com, founded just two years before in 1998 at the height of the dot-com bubble.
Pets.com went public on the NASDAQ just weeks after the Superbowl with the symbol IPET.
And just 270 days later it was out of business, its stock price having fallen from $11 to just 19 cents in the interim.
The autopsy showed that Pets.com was selling its products at nearly 30% below cost, giving rise to the old mystifying dot-com logic, “We lose money on every sale but make up for it in volume.”
Granted, Pets.com did not have the benefit of a printing press, monopoly over the money supply, or worldwide intransigence in the existing financial system, so they couldn’t kick the can down the road too far.
But it remains yet another hallmark of one of the most important lessons in financial history: sooner or later, bubbles correct.
That goes especially for our current bond and debt bubble, for which Elliott Management’s Paul Singer succinctly projects:
“The ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense, and large.”
By comparison, investors in Pets.com were being almost downright conservative when compared with today’s bond investors.
At least early stage technology venture have the potential to generate eye-popping returns.
Dell Computer, for example, delivered total returns to shareholders of 91,863% during the 1990s.
Yet anyone buying 5-year Japanese government bonds today and holding to maturity will be guaranteed a loss of -0.2%, not including the impact of inflation or the prospect of default considering Japan’s 230% debt-to-GDP ratio.
Owning Japanese government bonds makes about as much sense as Pets.com in 2000.
And yet if market size is any indication, these Japanese government bonds remain among the more popular investments in the world.
What could possibly be driving major institutional investors to such madness?
Remember that the traders and bankers who work for the big institutions are all human beings… human beings who see their colleagues raking in huge bonuses for following the rest of the herd into these garbage investments.
This provides a huge disincentive to step boldly in the direction of sanity.
In many respects, job security and incomes of the individual cogs who make up the big machines of institutional finance depend on conformity.
They have every motive to maintain that the Emperor is fully clothed even though a child can see that he is totally naked.
Make no mistake, most major market participants have an enormous interest in maintaining the status quo. It’s impossible to overstate this.
No one wants to see the system fail, so the big money will keep buying and keep propping up the market up until the final moment.
As a result, it’s entirely possible (and likely) that markets continue an upward trend. Until they don’t.
This serves as a dangerous feedback loop to reinforce a false narrative that everything is awesome and under control… prompting cautious smaller investors to feel like they’re missing out.
Beware FOMO, the fear of missing out.
If the price of something seems unsustainably high, don’t try and benefit by speculating (short or long).
That’s too dangerous.
When it’s clear the game has become rigged, it’s easier and less risky to stop playing that game, and go play a different game somewhere else.
We continue to identify three specific games elsewhere–
One area is systematic trend-following funds, which offer the potential for meaningful portfolio insurance in a world where systemic risk is rising.
Systematic trend-followers perform very well when there’s extreme volatility and exogenous shocks. But it requires incredible, unemotional discipline.
As legendary trader Jesse Livermore put it,
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor.”
Another area we’d point out is gold and silver.
If you believe that policymakers will continue to print more money, indebt their citizens, and make foolish decisions, then having a universally-recognized, real asset money-substitute is a sound choice.
Finally, consider “defensive value”.
Shares of fantastic businesses that are managed by talented people of integrity tend to make excellent investments, especially when you can purchase those shares at a discount to the company’s long-term intrinsic value.
If you can find extreme value, like buying a great business for less than the amount of cash it has in the bank (which does happen from time to time), even better.
Yesterday the Federal Reserve released the minutes from its July meeting a few weeks ago in which they decided to NOT raise interest rates.
These minutes are the official archive of the meeting, providing details about the presentations, debates, and discussions that took place.
They contain very formal sounding language, referring to their near-zero interest rates as “accommodation” in the same way that my high school health teacher preferred to use the more clinical term “copulation” instead of “sex”.
As an example, the most recent Fed minutes state:
“members agreed to indicate that they would continue to closely monitor global economic and financial developments.”
What in the world does that even mean?
I really get so tired of their forked-tongue garbage.
Interest rates are at 5,000 year lows. There are now 500 MILLION people around the world, in fact, living under NEGATIVE interest rates.
Remember that money is essentially nothing more than a measurement of economic value, in the same way that a meter or a mile is a measure of distance.
Just imagine the chaos if there were some unelected committee of bureaucrats who got together from time to time to change the value of the mile.
Or imagine if, tomorrow morning, they decided that the mile would be shortened by 20%.
Some people would benefit from that arrangement (taxi drivers). Others would be worse off (taxi passengers). There are always winners and losers.
Similarly, there are always winners and losers with monetary policy.
And these unelected central bankers have made a series of very deliberate decisions to forsake one segment of the population (anyone trying to save money) for the benefit of another (those who are heavily in debt, like, ummmm, governments).
They try to wrap their decisions up with fancy sounding language about “accommodation” and 14 pages of fluff like
“. . . the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand.”
But if there were some secret minutes detailing the Fed’s inner conscience that were leaked to the public, here’s what they would really be saying:
“Nothing terribly catastrophic has happened yet, so we have decided to continue screwing responsible savers with interest rates that are at 5,000 year lows so that this dangerous asset bubble can persist, the federal government can continue indebting future generations, and the commercial banks can keep making tons of money, because we are shit scared that even the tiniest 0.25% increase in interest rates will completely derail this totally fragile economy, and that would be really bad for Barack Obama and Hillary Clinton.”
When you think about ‘insurance’, chances are you probably think about term life, home insurance, or liability insurance.
But one of the best insurance policies you could ever get your hands on is a second passport.
Like most types of insurance, it’s one you hope you never have to use.
No one wakes up in the morning and thinks “I hope my house burns down today so I can cash in on that homeowners policy…”
But if the day ever came where you felt like you needed to get out of Dodge, or political turmoil in your home country ever became extreme, or you felt your family’s safety was in danger, having another citizenship ensures a way out.
It means that, no matter what happens, you’ll always have a place to go.
In short, this Plan B gives you another option… which fundamentally means more freedom.
UNLIKE most types of insurance, though, having a second passport can also provide a lot of benefit even if nothing bad ever happens.
With a second passport, you have the ability to travel, invest, and do business in more places.
In many cases your children, and your children’s children, will also inherit the second citizenship you obtain, so future generations will continue to reap benefits from this no-brainer insurance policy.
As the world has gotten crazier over the past several years, the interest in obtaining a second passport is rising.
Entire governments are sliding into insolvency. Capital controls have been introduced. Interest rates are negative.
Terrorism, race violence, and mass shootings abound. Dangerous political candidates dominate.
And folks are starting to realize that a second passport is an excellent insurance policy against these threats.
The common misperception, however, is that a second passport is only for the ultra-wealthy.
And that’s simply not true. ANYONE can obtain a second passport.
Now, some people are fortunate enough to be a part of the lucky bloodline club.
In other words, their parents (or grandparents) hail from places like Ireland, Poland, etc., so they’re entitled to obtain nationality by ancestry.
This is, by far, the fastest, easiest, and most cost effective way to obtain a second citizenship.
But it’s not the only way.
Another option is to “buy” a second passport.
No, not from the shameful, unethical morons on the Internet talking about their ‘hookups’ in Mexico and Bulgaria.
I’m talking about legal “citizenship by investment” programs that have been established in a number of countries like Malta in Europe, to Antigua, Dominica, and St. Kitts in the Caribbean.
The rules for these programs vary, but the general idea is that you make an investment or donation, plus pay a bunch of hefty fees, in exchange for citizenship and a passport.
These are completely legitimate programs, and the passports themselves are very high quality (i.e. you can travel visa-free all over the world with them).
But the price tags on these programs can be anywhere from low six figures up to a few million dollars.
Investment-based citizenship programs are definitely for the wealthy.
If you have $100,000 or even $1 million, it doesn’t make financial sense in most cases to buy another passport.
If you have $10 million or more, dropping $250k on a passport is no big deal.
So what about folks who aren’t ultra-wealthy or part of the lucky bloodline club?
Easy. There are dozens of options for people who are of more modest means to obtain this ultimate form of insurance.
Establishing legal residency in a country is often the most straightforward way to eventually become a citizen.
Depending on each individual country’s specific rules, you first obtain residency (or an immigrant visa) which usually confers legal status to live AND work in a country.
And after a certain number of years of residency, you become eligible to apply for naturalization and citizenship.
This varies from country to country; it can be as little as two years (Argentina) to five years (Panama) to ten years or more.
So instead of “paying” for citizenship with money, you pay with time.
But here’s a secret: in many countries, you don’t actually have to maintain a physical presence in the country in order to qualify for naturalization.
In some countries, you can maintain your residency “on paper” without actually having to move there full time.
So you establish residency on your first trip down, take a few vacations there over the years, and eventually submit your paperwork for naturalization.
(Other countries only require a temporary presence, i.e. six months worth of residency, in order to qualify.)
In the meantime, you and your family still have full legal status to live, work, invest, and do business in the country.
So you are still receiving most of the “insurance” benefits of a second passport without having to fork over hundreds of thousands, or even millions of dollars.
And of course, in a few years, you can qualify to apply for naturalization, after which you’ll receive that second passport.
Residency-based citizenship takes a bit more patience, but it’s a very cost effective way to get a second passport.
This is a strategy that makes sense no matter what.
Again, even if nothing catastrophic ever happens with your bankrupt government or financial system, and it’s all rainbows and unicorns from here on out, there’s no downside in having the addition option to live, work, invest, and do business somewhere that you want to be anyhow.
But if something bad does ever happen, you’ll already have your Plan B in place.
After all, you don’t want to start thinking about where you’ll go and what you’ll do AFTER things have already gone bad.
Maybe that day never comes. And so what? In a few years you’ll have another passport, and all the freedom and benefits that go along with that.
And future generations will be able to enjoy those benefits based on the tiny effort that you made today.
It started in 1946.
American Airlines, then the largest airline in the United States (and second largest airline in the world after the Soviet Union’s Aeroflot) created a bold, new technology to book flight reservations.
They called it the “electromechanical reservisor”, and it was the first machine of its kind.
Before the reservisor, American Airlines employees booked all reservations by hand using index cards and lazy susan filing systems.
Needless to say, the manual system was prone to substantial human error, and airline executives were keen to automate the process.
They went through several iterations of the technology until, in 1964, they completed the largest non-government data processing network in the world.
It was called Semi-Automatic Business Research Environment, or SABRE.
With its IBM 7090 mainframes, the system was able to process tens of thousands of tickets per day, pushing up-to-date seat inventory to more than 1,500 ticketing agents across the country.
Within the next several years, most major airlines (including Delta and United) followed with their own booking systems.
Fast forward a few decades, and those systems from the 1960s still form the core technology of airline reservation systems today.
Sure, they’ve managed to put on a few fresh coats of paint, building new websites and mobile apps to keep pace with the 21st century.
But deep down beneath the digital veneer, airlines are plagued anachronistic technologies that are barely held together with constant patches and reams of duct tape.
This is ultimately what caused Delta’s ignominious flight outage last week.
It’s also what caused American Airlines flight outage in late 2015. And 2013. Plus United’s 2015, 2011, and 2007 outages. Etc.
It raises the question– since old technology breaks down so easily, why not just start over with new technology?
It’s because these airlines are so dependent on the old technology that to completely replace it would mean having to press PAUSE on their entire businesses for weeks and weeks.
They’d have to ground all flights and cease making any new reservations while they replace the networks, migrate the data, retrain staff, test the system, etc.
For airlines that operate around the world 24/7, that’s an impossibility.
So, with their hands tied, they keep moving forward with patches and minor updates hoping to stave off technological catastrophe just a little while longer.
Here’s why I’m mentioning this today: it’s not just the airlines.
Nearly every legacy industry in the United States (and most of the West), including the electrical grid, nuclear, etc. runs on similar antiquated technology.
It’s the same with banks.
Retail banking is essentially a complicated assortment of accounting ledgers, and the technology that banks use to keep track of it all is called their “core software”.
Whenever you make a deposit, withdrawal, or account transfer, the bank’s core software updates your account and all the various accounting ledgers.
Thing is, some of the most popular core software platforms (like IBM’s AS/400) were introduced in the 1980s, way back before the digital revolution.
In other words, the most important financial transactions in our daily lives are driven by 30+ year old technology that’s no better than the original Nintendo Entertainment System.
Just like the airlines, this fragile patchwork of outdated technological platforms is prone to failure. Or being hacked.
Banks fortunately have a lot more money to throw around (namely your money, and my money), so they are able to recruit and retain very high quality IT talent to keep kicking the can down the road a little while longer.
But it does provide yet another major reason why banking, at least as we know it, isn’t going to exist in another decade.
Right now, at this very moment, all the tools and technology already exists to completely eliminate the need for banks.
Every single function of a bank, from deposits to lending to money transfers, can be conducted better, swifter, and cheaper outside of the banking system.
You can send money across the world, exchange currency, buy stocks, borrow money, etc. with a couple of apps and websites now, all without having to go through a bank.
Blockchain, social networking, and the shared economy have changed everything in finance, and the companies that bring these concepts to consumers are rocketing ahead.
Western banks, which are sorely lagging behind with their antique technologies, have absolutely no chance of catching up.
So while they may be able to kick the can down the road for a few more years, the long-term trend is pretty clear.
Banks are dying. And this not only has big implications for your savings, but also for your business and investment potential… because there are tremendous opportunities for anyone who focuses their capital and talents ahead of these big picture trends.
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]
“Negative interest rates are not the fault of central banks”
– Martin Wolf column for the Financial Times of 12 April, 2016.
From ‘Human Action’ by Ludwig von Mises:
“But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
“It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”
The masses, it seems, have been waking up for a while. Not only have we had state sanctioned
inflationism ever since the credit crunch, but the developed world’s central
banks have done their best to destroy faith in money altogether. It turns out that
hyperinflation itself wasn’t a necessary precondition for a crack-up boom – taking interest
rates into negative territory was quite sufficient to trigger a rush into real assets.
Everybody loves the early stages of inflation, writes Jens O. Parsson in ‘Dying of Money’;
“The effects at the beginning of an inflation are all good. There is steepened money
expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait.
In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
Alasdair Macleod for The Cobden Centre points to the extreme overvaluation in equities
and bonds worldwide:
“Because today’s price inflation is mainly confined to assets, no one worries. Instead
investors rejoice in the wealth effect. Assets are excluded from the consumer price indices, so the danger of a fall in the purchasing power of money in respect of assets does not appear to exist. This does not mean that the problem can be ignored. But if the reason behind rising markets is a flight from cash, we should begin to worry, and that point in time may have arrived. If so, we should stop rejoicing over our increasing wealth, and think about the future purchasing power of our currencies.”
If you want to start a flight from cash, introduce negative interest rates – something that
would be impossible within an unfettered free market. Make depositors pay for the privilege
of being unsecured creditors to the banks. While you’re doing that, make sure – in the case
of the EU – that your banking system remains unreformed and chronically undercapitalised.
Sadly for most economists and all central bankers, human nature is not as tractable as a
policy rate. This leads the Wall Street Journal of August 8th to ask “Are negative rates
Early evidence would appear to confirm the suspicion.
When the German greengrocer Heike Hofmann heard that the ECB was cutting rates below
zero in 2014,
“she considered it “madness” and promptly cut her spending, set aside more money and bought gold. “I now need to save more than before to have enough to retire.””
The article also cites the example of Lasse Bohman, a 63-year old newsstand worker from
“said the concept of negative interest rates is “weird” and makes him want to save more for retirement rather than spend. “I am just going to keep on putting money in the bank,” he says, or “put it under the mattress at home.””
In December, Ms Hofmann used her Christmas bonus to buy two 10 gramme bars of gold.
“She has since bought more and has put it, and every euro she can set aside, into a safe at
home, saying she doesn’t trust banks. “Every time I check my savings account, it makes me
want to cry.””
Note that Ms Hofmann is bypassing the banking system entirely – as she should. (The
website Zero Hedge reported last week that the German economic research institute ZEW
had found that Germany’s largest bank, Deutsche Bank, using US stress tests had a potential
capital shortfall greater than its entire market capitalisation.)
The WSJ article also points out that consumers are saving more in Germany and Japan. In
Denmark, Switzerland and Sweden, three non-eurozone countries that now have negative
interest rates, savings are at their highest since 1995. It’s almost as if QE and ZIRP were
having precisely the opposite effect to that which the central banks intended. The article
also cites Hans-Gerd Wienands, CFO of the German industrial gas business Messer Group:
“This odd policy of negative interest rates hasn’t motivated us to invest more. On the
contrary, it’s a signal that the economic situation isn’t improving.”
When deposit rates fall below zero, even as counterparty risks are rising, it is entirely logical
to seek alternative homes for capital rather than sheltering meekly in cash. Bonds,
unfortunately, do not make sense when their yields are also negative.
That leaves the world of listed equities as the major alternative tradeable asset class. But the
awakening masses have been putting their money to work in the world’s stock markets for
some time already, making most markets overvalued in the process. The pragmatic response
to all of these challenges is surely to favour investments that still offer a margin of safety:
shares in high quality but undervalued businesses, generating solid operating profits yet
trading at attractive valuations. Which is precisely what we’re doing here.
And if you share our view that QE is now doing more harm than good to the UK economy,
but is in fact actively detrimental to the interests of savers, investors and pensioners, please
sign this petition to end it, and circulate to friends and family. Thank you.
On Friday morning, a gentleman named Thomas Hoenig wrote some rather unflattering comments about the US banking system in a little known publication called the Wall Street Journal.
In his remarks, Hoenig stated that “while the largest U.S. banks have increased capital since the  crisis, their capital is still lower than the industry average and inadequate for bank resiliency.”
Think about what means. A bank’s “capital” is essentially its rainy day reserve fund.
If there’s a giant mess in the financial system and asset prices collapse (as they did in 2008), a bank with plentiful capital will be able to withstand the crisis.
Banks with inadequate capital will fail.
Hoenig is suggesting that many of the largest banks in the US fall in the latter category.
More importantly, Hoenig slammed the ridiculous accounting methods that banks use to report their financial condition, something he said “too easily allows banks to conceal risk.”
So Hoenig is telling us that banks have insufficient capital to be resilient in a crisis and can too easily hide their risks. Crazy.
So who exactly is this whack job Thomas Hoenig? What sort of social deviant would possibly question the sanctity and soundness of the US banking system?
Hoenig is the vice chairman of the FDIC, as well as former president of the Kansas City Federal Reserve Bank.
So, he’s not a whack-job. He’s the ultimate banking insider.
I’ve been writing about this for years, detailing how most Western banks have, at a minimum, questionable levels of capital, and they play all sorts of accounting tricks to mask their financial condition.
But as I often say, don’t take my word for it. Listen to the banks themselves.
Major banks report their numbers every single quarter.
And if you’re a financial wonk like I am, you can tear apart bank balance sheets and see for yourself how dangerously low their levels of liquidity are, and the almost comical ways they’re conveniently hiding huge losses in their bond portfolios.
Well, now you can listen to the #2 executive at the FDIC as well.
One of Hoenig’s major points is that bank accounting methods allow them to live in a pretend world where their assets carry ZERO risk.
For example, prior to the financial crisis, banks were allowed to assign a zero risk rating to all their toxic subprime mortgages.
It didn’t matter that this stuff was worthless. The banks were able to carry all these assets on their balance sheets at 100 cents on the dollar as if it were cash.
It’s not much different today.
Now, instead of holding subprime mortgages and pretending that they’re risk-free, banks are holding subprime government bonds.
They’ve loaned trillions and trillions of dollars of YOUR MONEY to bankrupt governments, in many cases at NEGATIVE interest rates where the bank is almost guaranteed to lose money.
And yet they continue to categorize these assets as “risk free”.
This means they don’t need to have any contingency plans or keep any additional capital in reserve in case of default.
This is an unbelievable level of deceit, and finally the FDIC is calling BS.
To hammer this point, just hours before Hoenig published his editorial, the biggest banks in the US requested a FIVE YEAR extension to comply with the Volker Rule.
The Volker Rule is part of a new regulation that forces banks to sell certain risky assets that have the potential to become toxic again.
This rule was born from the ashes of the 2008 financial crisis, and it was originally supposed to go into effect in 2014.
So they requested a 1-year delay. Then another one. And another one. And now finally a 5-year extension through 2022.
That’s an EIGHT YEAR delay to sell off these high-risk assets that they still own.
Why do they need an eight year delay?
Simple. Because there’s no market for these risky assets. No one else wants to buy them.
If the banks sell today, they’ll lose a fortune… reducing their capital levels even more.
So instead of selling, the banks just keep asking for an extension and pretending that these risky assets are worth full value (i.e. what they paid).
Again, it’s another scam designed to make you think the banks are much safer than they actually are.
Look, I’m not suggesting that your bank is going to collapse tomorrow.
But the reality is that your bank is probably nowhere near as safe as you think it is.
And this matters.
As I’ve written before, most people spend more time arguing about what they’ll eat for dinner tonight than thinking about the financial health of their bank.
A bank is your financial partner. Don’t simply assume that it’s safe just because everyone else does.
Be sure. And if you can’t be, it certainly wouldn’t hurt to reduce your exposure to the bank.
Buy a safe, withdraw some funds, and hold a month’s worth of living expenses in physical cash.
With interest rates at basically zero, there’s almost no downside in doing this.
The year was 1986.
Top Gun was the #1 movie in America.
Halley’s Comet was visible with the naked eye.
Microsoft went public, instantly making Bill Gates one of the wealthiest people in the world.
And the US government took in $93.7 million through a little known authority called “Civil Asset Forfeiture”.
As you’re likely aware, Civil Asset Forfeiture is a legal process that allows the government to seize assets from private citizens without any due process or judicial oversight.
People can be deprived of their private property without ever having been even charged with a crime, let alone never having actually committed one.
The horror stories of its abuse are endless.
People who have never done anything wrong have had their life’s savings, homes, and business assets confiscated without so much as a warrant.
This constitutes theft, plain and simple.
And like most government initiatives, it started small.
Again, the statistics from 1986 show $93.7 million worth of cash and property was seized by the government.
By 2014, that figure had grown 4,667% to a whopping $4.5 billion.
And we learned in 2015 that the government stole so much private property from its citizens that the total amount exceeded the value of all property stolen by every thief and felon in America combined.
It reminds me of that sign Ron Paul used to keep on his desk during his tenure in Congress: “Don’t steal. The government hates competition.”
The public also learned about all the extraordinary incentives for state, local, and federal police agencies to steal from private citizens.
The entire idea behind Civil Asset Forfeiture is that they can confiscate your property, then put the burden on YOU to prove that you didn’t do anything wrong in order to get your property back.
So much for innocent until proven guilty.
It’s such an astonishing scam: how is someone supposed to be able to afford to prove his/her innocence after their financial resources have been confiscated?
Moreover, it turns out that these agencies are all sharing the wealth among themselves.
The US Department of Justice routinely doles out hundreds of millions of dollars of these stolen funds to local police in a corrupt sort of ‘proft sharing’ arrangement.
DOJ statistics show that between 2000 and 2013, federal “equitable sharing payments” to state and local law enforcement more than tripled, totaling an incredible $4.7 billion.
There are some sickening stories of police departments using this money to buy things like margarita machines, trips to Hawaii, concert tickets, and more.
Again, this is money that was stolen from private citizens without a warrant or any due process whatsoever.
24-year old Charles Clarke, for example, had $11,000 in physical cash on him when he was traveling through Cincinnati airport.
Clarke didn’t have a bank account; he had been saving money for his entire life, including his disabled mother’s VA pension from her time in the military.
He ordinarily kept the cash at home but was traveling with it because he and his mother were moving apartments.
Local officials at the airport saw the money, and, despite it being perfectly legal to carry physical cash, they thought it was suspicious and confiscated it.
His entire life’s savings was stolen by the government in an instant. And he hadn’t done anything wrong or charged with a crime.
There are countless more stories like Clarke’s.
But it turns out that was all just Phase 1 when Civil Asset Forfeiture was a type of ‘passive’ theft.
Law enforcement agencies would seize funds and assets as a target of opportunity, like Clarke’s money at the airport, or a cop who spots a few thousand dollars in cash at a routine traffic stop.
These are the normal stories.
But now we find out that federal agencies, led by the DEA, are now actively stalking Americans to figure out what they can seize.
Like sophisticated thieves who case a jewelry store before robbing it, the DEA has been trolling Americans’ travel records looking for ‘suspicious’ activity.
I’m not talking about past travel. I’m talking about upcoming travel.
Anytime you book a flight, airlines create a code called a PNR, or Passenger Name Record, with all of your travel details and personal information.
And what a surprise– the federal government has gotten its hands on this data.
So now it seems the DEA is combing through PNRs looking for suspicious activity like last minute, one-way tickets.
Because apparently only slimy low-lifes who carry treasure troves of illicitly acquired cash buy last minute one-way tickets.
This is amazing: you’d think that, with the obvious public backlash against Civil Asset Forfeiture over the past two years that the government would tone down the practice.
On the contrary, they’re taking it to the next level.
So now instead of passively waiting to steal from citizens as the opportunities arise, they’re actively casing our travel itineraries looking for potential targets.
This is truly banana republic stuff.
This trend serves as an obvious reminder: when you live in a place with such a corrupt system of justice, does it really make sense to keep 100% of your wealth and life’s savings within their easy reach?
The fact is that any court, police department, or government agency can seize your assets in an instant: your cash, car, bank account, business, and even your home.
And with the data this obvious, it’s simply not worth the risk.
There are so many legal steps you can take to insulate yourself from this growing, ominous trend.
You can move some funds offshore to a safe, stable foreign bank. Or even hold some gold and silver abroad in a non-reportable safety deposit box.
But doing nothing in light of this trend is practically an invitation to get robbed.
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Heike Hoffman is a 54-year old fruit merchant in a small town in western Germany.
She has no formal training in finance. She’s not running a multi-billion dollar portfolio.
And yet, as the Wall Street Journal reported on Monday, “[w]hen Ms. Hoffman heard the ECB was knocking rates below zero in June 2014, she considered it ‘madness’ and promptly cut her spending, set aside more money, and bought gold.”
She’s right. It is madness.
There’s $13+ trillion worth of bonds in the world right now have negative yields, much of which is issued by bankrupt governments (like Japan).
Stock markets around the world are at all-time highs even as corporate profits have been in long-term decline.
And in a growing number of countries, even doing absolutely nothing and holding money in the bank means that you’ll be penalized with negative interest.
These risks are even worse for major “institutional” investors like pension funds.
Big investors have far fewer investment options than regular people like us. They need extremely large markets to deploy their capital.
Think about it like this: if you have $100 billion to manage, you wouldn’t even be able to consider a small investment, like a $200,000 town home.
$200,000 is just .0002% of your portfolio. It’s far too small to even think about.
A senior investment manager at one of China’s sovereign wealth funds once told me they only consider deals that are at least $1 billion or more.
Anything else is just too small, no matter how attractive.
This is why it’s so great to be a smaller investor.
We have recommended unique investments to members of our premium services, for example, that generate anywhere from 5% to 12% in very safe returns that are fully backed at a substantial margin by real assets (including gold).
But the market size for these investments is only around $20 million.
If you had $20,000, $200,000, or even $2 million to invest, your portfolio is the perfect size for these types of investments.
But if you had $200 billion to manage, you wouldn’t be able to consider them. The investments are simply too small.
That’s why large investors end up buying government bonds: the market is enormous.
The market for US Treasuries, for example, is $19 trillion.
So even if you’re managing $200 billion, the market size for US government bonds is big enough that you could easily snap up Treasuries.
It’s the same with stocks.
Wal Mart, Apple, Toyota, Samsung… the market size of large public companies is worth tens of trillions of dollars, big enough for major funds to invest.
But again, that’s precisely the problem.
Almost every single market and asset class that’s big enough for major institutional investors is at/near its all-time high.
The yields on government bonds are at the lowest levels in recorded history (and in many cases even negative).
Stocks are at record highs at a time when corporate profits are in decline.
Many funds around the world (especially in Europe) have been jumping into the US market as a “safe haven” against all the Brexit uncertainty.
Yet they’re doing so at a time when the US dollar is at a multi-decade high, and both US stocks and bonds are at all-time highs.
It’s generally not the greatest investment strategy in the world to buy assets at their all-time highs… you’re taking on a LOT of risk.
But major funds and institutions have very few options available.
Simply due to their massive size, they’re chained to these risky asset classes. Even doing nothing and holding money in the bank could mean paying negative interest.
But there is one very big exception: gold.
The total market size for gold, as estimated by the World Gold Council, is more than $7 trillion.
That’s a big market, more than sufficient for institutional investors to deploy billions, even tens of billions.
Central bankers have been doing it themselves, snapping up hundreds of tons of gold in recent years.
(The Chinese bought tens of billions of dollars worth of gold in the last year.)
Yet unlike stocks and bonds, gold is NOWHERE NEAR its all-time high, at least in US dollar terms.
In fact gold can still appreciate nearly 50% before it breaks its previous price record.
This means that GOLD is about the only major asset class that isn’t anywhere close to its all-time high, but still a big enough market for institutional investors.
Stocks are very expensive. Bonds are insane. Bank rates are negative for many large investors.
But gold is still historically inexpensive despite having appreciated substantially this year.
So gold should become much more attractive to large investors, especially since there will likely be more debt, more money printing, more capital controls, and more monetary insanity in the future.
These trends are pretty clear.
And if you understand them, the case for owning at least a small amount of gold is obvious.
Don’t fall in love with gold. Don’t maintain a religious devotion to it. And don’t dive in headfirst with your entire life’s savings. Accumulate slowly.
But do recognize that there’s no other global, highly liquid asset that increases in value as governments and central banks decline.
So having even just a little bit of gold can be an excellent insurance policy.
PS. If you want to learn more about how to generate, safe, consistent investment returns backed by gold, as well as the best places to store gold overseas, don’t hesitate to try out a risk-free trial of Sovereign Man: Explorer, one of our most popular premium services.
Long ago in the Land of the Free, if you wanted to start a saloon, you rented a space and started serving booze.
You didn’t have to go through years of petitioning a bunch of bureaucrats for permits and licenses.
If you weren’t qualified or good enough at your job, your reputation would suffer and you’d go out of business.
This is the way it used to be for just about every industry and profession.
It wasn’t until 1889 that the US Supreme Court ruled in Dent v. West Virginia that states had the right to impose “reasonable” certifications or licenses for various professions.
At first, most states only licensed physicians, dentists, and lawyers.
In fact, by 1920, only about 30 occupations in the US required any sort of licensing.
By the 1950s, about 5% of US workers required a license to perform his/her job.
Today that number has risen to 30%, and climbing.
Some of our modern examples are completely insane.
According to the Brookings Institute, the state of Nevada requires 733 days of training and a $1,500 fee for a license… just to become a tour guide.
Over in Michigan, it takes 1,460 days of education to become an athletic trainer.
45 other states have license or certification requirements for athletic trainers. All fifty states have licenses for barbers and cosmetologists.
36 states require licenses for make-up artists. 34 states license milk samplers. And a mere 33 states license auctioneers.
These license requirements continue to grow, along with the overall level of rules and regulations in the Land of the Free.
Just this morning the US government published an extra 227 pages of rules, regulations, and proposals.
This happens every single business day in America.
Last week the government published over 2,000 pages of new rules, many of which border on absurdity.
To give you an idea, USDA’s Agricultural Marketing Service proposed a rule about minimum and maximum diameters of potatoes that are sold in the State of Colorado.
Yes I’m serious.
This is the sort of madness that government bureaucrats churn out on a daily basis: more rules, more licenses.
Needless to say, the more of these rules they create, the more difficult it becomes for people and businesses to produce.
So it wasn’t exactly a big surprise when the US Labor Department released statistics a few days ago showing that, for the third straight quarter in a row, productivity in the Land of the Free declined.
In other words, US workers are producing less than they did before.
We haven’t seen this trend since 1979. And it’s the exact opposite of what’s supposed to happen.
As workers get more experienced and technologically advanced, productivity should grow.
But it’s not. US production is buried under countless pages of regulations and licensing requirements. And the trend has been negative for quite some time.
From 2000 through 2007, US productivity was about 2.6%.
Between 2007 and 2015, it shrank by half to about 1.3%, barely keeping up with population growth.
Now productivity is actually shrinking. America is going backward.
But there’s another side to this story.
Because while US economic growth has practically halted and productivity is shrinking, DEBT CONSUMPTION is up. Way up.
Americans are once again indebting themselves, often to buy useless things they don’t really need.
Auto loans and credit card debt are just two categories registering significant upticks.
(Not to be left out, the US government is leading with way with an absolute explosion in federal debt…)
So what we’re basically seeing now in the Land of the Free is people going into debt to consume more, while simultaneously producing less.
This is a pretty dangerous trend.
Human beings realized 10,000 years ago that if they wanted to survive, they had to produce more than they consumed.
During the Agricultural Revolution our early ancestors learned that, instead of constantly hunting for game, they could plant seeds in the ground and produce more food than they could possibly eat.
You and I wouldn’t be here if they hadn’t figured out this simple principle.
I call it the Universal Law of Prosperity, and it applies to governments, businesses, and individuals alike.
Any nation that fails to produce more than it consumes is in for serious trouble. And the government’s own data is showing that this is happening.
They create countless rules, regulations, and licensing requirements to make it more difficult to produce… and we can already see the results with (lack of) GDP growth.
Meanwhile they’ve slashed interest rates down to zero to incentivize people to consume.
It’s not hard to see where this trend is going.
It started with an illegal wiretapping scandal.
Jean-Claude Junker, after spending nearly 18 years in office as Prime Minister of Luxembourg, was forced to resign in 2013 after evidence surfaced of his complicity in a domestic spying operation.
So what does a disgraced politician who resigns in shame do?
Why, receive a promotion, of course.
Less than a year later, Junker was appointed to the most powerful political office in Europe– President of the European Commission.
(I say “appointed” because Junker was selected by the reigning political establishment, not by voters.)
Aside from being one of Europe’s most prominent unelected policymakers, Junker has become legendary for his bizarre quips and daft behavior.
(Here’s some incredible footage of an intoxicated Junker marching in place and slapping around other world leaders at a press event.)
Among Junker’s most famous quotes are perhaps the truest eight words in politics: “When it gets serious, you have to lie.”
That was from 2011 when Junker was caught lying about a secret meeting about Greece’s debt crisis.
On the surface, the politicians insisted that Greece was just fine.
Yet all the while they were lying to the public, they were preparing for an emergency behind closed doors.
I was reminded of this quote recently when the European Central Bank published results of its bank “stress tests”.
The ECB conducted these tests to prove that Europe’s biggest banks were just fine and would be able to withstand another major crisis.
Surprise, surprise, nearly every bank in Europe passed with flying colors, as if the ECB were saying, “Nothing to see here people…”
One of the ECB’s primary missions, after all, is to maintain stability in the financial system.
And when your financial system is this toxic, the ECB can’t maintain stability by telling the truth about their insolvent banks.
“When it gets serious you have to lie.”
Here’s the reality: Europe’s banking system is toast.
Wholesale interest rates on the continent are already negative.
Negative interest rates essentially penalize any bank that tries to be responsible and hold extra reserves
What an unbelievably stupid policy.
Rather than encourage banks to be conservative with their customers’ deposits, the ECB is practically forcing them to make as many loans as possible.
So it’s not exactly much of a shocker to find out that, in their haste to loan out almost 100% of their customers’ money, many of the loans went belly-up.
EU data showed that by the end of September 2015, 17% of Italian loans were non-performing. The non-performing loan rate is a shocking 43.5% in Greece, and 50% in Cyprus.
(That data is nearly a year old, so the numbers are worse now.)
This is a huge problem. Banks have lost a big chunk of their depositors’ savings.
There’s a lot of talk now about government bail-outs. And some of that has already taken place.
In Italy, the government already had to step in with a 150 billion euro guarantee just to forestall a potential bank run.
But the Italian government is one of the most bankrupt in the world, with a debt level that exceeds 130% of GDP; they’re in no position to bail anyone out.
That’s why, as of January 2016, European “bail in” legislation has taken effect.
The rules are already in place whereby depositors can be held liable for the idiotic financial decisions of their banks.
If the bank goes under, they can take your money down with it.
It’s already happened.
In 2013, the government of Cyprus froze EVERY bank account in the country, locking every single depositor out of his/her savings.
These risks are very real.
Banks are illiquid and overleveraged. They’ve made far too many bad loans with their customer’s savings.
The governments are in no financial position to bail them out. And the bail-in legislation already exists to steal from depositors.
What’s the point of holding money in this kind of system, especially when the biggest benefit you could hope for is about a 0.1% yield on your savings account?
When you step back think about the big picture, the conclusion is pretty obvious: don’t hold money in such a precarious banking system.
And yet, it’s very seldom that anyone really thinks about his/her bank.
Chances are most people put more thought into what they’re going to have for dinner tonight than where their money should live.
A bank is your silent financial partner. This is an incredibly important decision.
Especially given that once you turn over your hard-earned savings, it’s not even your money anymore. You become an unsecured creditor of the bank.
A decision of this magnitude deserves more analysis. And anachronistic features like a bank’s location shouldn’t factor into the calculus.
Geography is totally irrelevant in the 21st century. You shouldn’t hold your money somewhere just because the bank is near your house.
Rather, your money should live where it’s safest and treated best.
Just in the same way that you would choose your neighborhood based on its safety or quality of schools for the kids, you can choose your bank (or at least banking jurisdiction) based on safety and quality.
For example, avoid banking in countries that have already adopted bail-in rules that allow them to steal depositors’ savings.
This includes Canada and the EU.
(The US Dodd-Frank legislation is conveniently opaque on this issue– more on that another time.)
Also, avoid banking in countries that are heavily-indebted; those are the places most likely to run into serious problems, and you don’t want your money anywhere near them.
Again, this rules out most of Europe.
Last, consider other options. You don’t need to hold 100% of your wealth in a bank, especially one that is in questionable health.
Physical cash and precious metals can be an excellent substitute for bank deposits, especially as interest rates continue to slide below zero.
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]
For those that already have, Mark Carney is the gift that keeps on giving. Borrowed imprudently and struggling to make those interest payments ? Worry not; the Bank of England has your back. For those that don’t have, the Bank of England is taking away your chance of ever realistically saving anything, now that interest rates have been driven down to new historic lows of 0.25%, and may go lower yet. For the asset-rich, for the 1%, for property speculators, and for zombie companies and banks, Carney is your man. For the asset poor, or for savers, or pensioners, or insurance companies, or pension funds, the Bank of England has morphed from being anti-inflationary fireman to monetary arsonist.
The economist Ludwig von Mises foresaw all this, nearly a century ago. He called it “the crisis of interventionism”. Actions have consequences everywhere (except in Keynesian and Marxist economic theory). Interfere with the free market process and inefficiency and complexity are certain to rise. More actions and interventions are required. Pretty soon the entire system becomes a Heath Robinson contraption requiring constant amendments and ad hoc fixes and bolt-on workarounds. Welcome to the modern monetary system – the last, doomed refuge of the central planner with messianic delusions of adequacy.
“The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.”
But so warped has our monetary system become after almost a decade of furious interventionism that Mark Carney’s redistributive efforts don’t even attempt to deliver to that objective. With interest rates fast approaching the theoretical lower bound of zero, Mark Carney is curbing the prospects of the poor for the benefit of the rich. He is redistributing capital from the prudent saver and gifting it to the borrower and the speculator. A crisis of too much debt is being met with ever more urgent attempts to prime the credit pump.
Mises had something to say about credit expansion, too.
“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”
The Bank of England, along with the US Federal Reserve, the European Central Bank and the Bank of Japan, has made it perfectly clear that the credit expansion will continue. They had better hope that Mises was wrong.
In a 2013 essay, Dylan Grice also addressed the crisis of interventionism.
“Prior to the 2008 crash, central banks set interest rates according to what their crystal ball told them the future would be like. They were supposed to raise them when they thought the economy was growing too fast and cut them when they thought it was growing too slow. They were supposed to be clever enough to banish the boom-bust cycle, and this was a nice idea. The problem was that it didn’t work. One reason was because central bankers weren’t as clever as they thought. Another was because they had a bias to lower rates during the bad times but not raise them adequately during the good times. On average, therefore, credit tended to be too cheap and so the demand for debt was artificially high. Since that new debt was used to buy assets, the prices of assets rose in a series of asset bubbles around the world..”
Wealth was redistributed towards the financial sector. It was also redistributed to those who were already asset-rich.
“Who paid ? Those with no access to credit, those with no assets, or those who bought assets late in the asset inflations and which now nurse the problem balance sheets. They all paid. Worse still, future generations were victims too, since one way or another they’re on the hook for it.
“So with their crackpot monetary ideas, central banks have been robbing Peter to pay Paul without knowing which one was which.. But what does it mean for the owner of capital ? If our thinking is correct, the solution would be less monetary experimentation. Yet we are likely to see more.. In an ideal world we would have neither Peters nor Pauls. In the imperfect one in which we live, we have to settle for trying hard to avoid the Pauls, who we fear mistake entrepreneurial competence for proximity to the money well. But when we find the real thing, the timeless ingenuity of the honest entrepreneurs.. we find inspiration too, for as investors we try to model our own practice on theirs..”
With $13 trillion of sovereign debt trading at negative yields, bonds as an asset class are barely investible. They are only a plaything for speculators.
Cash is also increasingly problematic, as the commercial banks are now making it abundantly clear that negative interest rates may soon be upon us, irrespective of what Mark Carney claims to think or want.
By a process of logic and elimination, with cash and bonds (and perhaps property) effectively out of the picture, that leaves common stocks. Given that many stock markets have been artificially boosted by central bank stimulus, that leaves listed stocks that still offer a margin of safety, ideally with principled management and a history of decent shareholder returns. There are fewer of them than there used to be, but they can still be found. They can be found on the roads less travelled.
Perhaps at some point our central bankers will come to appreciate that wealth is not created by the printing of money, nor is it created by a reduction in the official rate of interest – at a time when it is mostly the desperate that want to borrow money. It is created by honest entrepreneurial endeavour, which is itself jeopardised by constant monetary intervention. As Tony Deden puts it,
“Dishonest money has created a culture of speculation out of ordinary producers and savers. As a result, we confuse financial markets for the source of our wealth. Our time preference has been altered so that we seek returns incompatible with the real risks we take. We focus on market activity rather than on the substance that it fails to imply.
“Substance is something that is real. It does not necessarily have to be tangible, but that would be preferable. Whether it is in gold – a form of money – or honest entrepreneurship, substance is rooted in economic reality. And so, understanding substance, whether it is in money or in entrepreneurial and wealth creating activity, is the most important practical skill we must acquire.”
One of the most profound moments of my entire adult life came to me when I was learning about my family history, which I’ve managed to trace back over eight centuries.
I discovered so many incredible stories from the past, and the indelible conclusion that I’ve reached is that it’s an absolute miracle that any one of us exists.
The last few millennia have seen war, plague, and some of the worst conditions this species have ever experienced.
Looking back at my own ancestors’ lives I’m astonished at how many close calls I’ve had to never being born. I’ve calculated the odds, I had a 99.99999% chance of never existing.
But despite the odds, my ancestors survived. All of our ancestors survived.
And because of that string of luck, I’m here today. And so are you.
These days, we have it easy by comparison.
Most of us don’t have to deal with genocide, pandemic killer diseases, and civil war… yet we still have our own threats to face.
Governments across the West have amassed unprecedented amounts of debt, and are adding even more with each passing day.
Banks and whole financial systems are highly illiquid and in many cases even insolvent.
Our threats are financial. They are political. They are existential. And they are just as dangerous.
History is generous with examples of how governments, pressed by bankruptcy, have almost invariably turned to plunder the wealth of their citizens.
As well as how insolvent financial systems have culminated in extraordinary crises that have fundamentally changed the face of society.
It’s difficult to ignore these lessons today, especially when we can see things moving in the same direction.
It’s no secret that the US government is bankrupt. They tell you themselves each day as they publish how much debt they owe, to the penny, for the world to see.
It’s no secret either that the Federal Reserve is out of capital on a mark-to-market basis, which you can find stated very clearly in the reports they publish every Thursday.
The information is all right there for anyone who cares to look.
People who ignore these obvious realities do so at their own peril.
In many respects the purpose of our lives is to survive and pass wealth on to the next generation.
And that’s only possible if we can recognize the obvious trends and take action to prepare ourselves for what’s to come.
Luckily, given the modern technology available now in 2016, mitigating these risks is something that anyone can do.
And by taking the right steps it is more than possible to turn this period of chaos into one of opportunity.
Listen in to today’s podcast as I share some deep family history and the steps you can take to ensure that no matter what happens next you are in a position to not only survive, but thrive.
If you are a taxpayer in the Land of the Free, you may have recently received a love letter from the Social Security Administration that went something like this:
“Dear [Medieval serf paying into an insolvent pension fund]:”
(OK I added that part myself)
“Starting in August 2016, Social Security is adding a new step to protect your privacy. . .”
Whoa. Full stop. I love it already.
My dear Uncle Sam, who spends hundreds of billions of taxpayer dollars to spy on absolutely friggin’ everybody, is suddenly interested in protecting my privacy.
“This new requirement is the result of an executive order for federal agencies to provide more secure authentication for their online services.”
This part is hilarious. The US government has been hacked so many times over the last several years that it is the laughing stock of global cybersecurity.
Hackers have stolen 5.6 million government employee fingerprints, tens of millions of social security numbers, and financial and medical records from 19.7 million people who had been subjected to a government background check.
And those are just a few of the data breaches that we know about, and only over the last couple of years.
The US government is a veritable goldmine for identity thieves.
Social Security and Date of Birth data can sell for $30 on the black market. Stolen health records go for $10 to $50 each, and bank details can fetch up to $300.
So you can see why the Social Security Administration, which has SSN/DOB data for 300+ million Americans, not to mention emails addresses, physical mail addresses, health records and bank details for tens of millions more, may be the single most valuable repository of information in the world.
All that data is worth tens of billions of dollars at current black market rates. To put that in perspective, Google values its own data and intellectual property at $8.7 billion.
So now the Social Security Administration, under order from Barack Obama, is on a mission to fix its cybersecurity by implementing something called multi-factor authentication (MFA).
MFA is a security standard that requires a user to have at least two pieces of evidence to validate (or authenticate) that you are who you claim to be.
Different factors of authentication include things that you know (like a PIN code or password), things that you are (like a fingerprint or voice recognition), and things that you have (like a keycard that you swipe in a card reader).
The idea is that you have at least two of these factors to validate your identity.
Many banks, for example, issue security tokens that constantly refresh a special code.
So in order to log in, you have to enter your password (something you know) AND type in the special code from your security token (something you have).
This makes it much harder for your account to be breached.
Multi-factor authentication has been the industry standard for a long time. The FDIC has been pushing banks in this direction since at least 2005.
Even Facebook and Gmail have had MFA for several years.
So finally the US government is getting on board with the 21st century. Well done.
But as you can imagine, they managed to find a way to screw it up.
The Social Security Administration has started including mobile phones in their MFA platform.
So now when you log in, in addition to your password (something you know), they’ll send a special code via text message to your mobile phone (something you have).
That sounds great– though this does provide the Social Security Administration with even more of your personal data that will be compromised in a security breach.
Furthermore, if you don’t comply, or you don’t have a mobile phone, or if you’re living outside of the United States without a US phone number, “you will not be able to access your My Social Security Account.”
This is a great reminder of how governments operate.
They can (and will) change the terms of the deal at ANY time of their choosing without any regard for how it might affect you.
And of course, they’ll always tell you that it’s for your own safety and security…
It was only a matter of time.
In the wake of multiple terror attacks, the European Commission is moving towards creating a mandatory, centralized database of Bitcoin ownership.
Of course, their official reason is that Bitcoin is being used to finance terrorism.
So for everyone’s safety and security they need even more authority to spy on people’s finances.
But the reality is that these governments have hated Bitcoin since the beginning.
They don’t like the idea of a decentralized currency that they can’t control.
In the conventional financial system, governments have the power to regulate the banks and seize any account they want.
They can use their gun-toting police agencies to confiscate citizen’s physical cash… and given the alarming rise of Civil Asset Forfeiture in the Land of the Free, it’s clear they’re not exactly shy about stealing people’s money.
But they can’t do any of that with Bitcoin.
Bitcoin is a decentralized, distributed system. It’s impossible for anyone, or any government, to control it.
So the more people use Bitcoin, the more governments lose control.
History shows us, for example, that bankrupt governments almost invariably resort to capital controls– heinous obstacles that trap people’s savings inside a decaying financial system.
We’re already seeing this across the European continent.
Many banks in Europe have restrictions on how much money you can withdraw from your own savings account.
There’s also been rapid progress towards banning physical cash altogether.
But Bitcoin is a way for people to escape these capital controls… which is why it’s such a nightmare for bankrupt governments.
You’d think that intelligent governments would embrace Bitcoin.
You’d think that, rather than fight an obvious technological trend, they would encourage the banks and monetary policymakers to integrate Bitcoin’s concepts into the financial system in order to become more competitive and innovative.
But that’s not what happens.
Bankrupt governments have a permanent scarcity mentality.
Once they enter desperation mode, their only solution is more government, more regulation, more spying, and more control.
It’s literally the exact opposite of what they should be doing.
Now, in response to all of these terrorist attacks, the bureaucrats finally have an excuse to expand their control.
So rather than getting on board with the technology and joining the 21st century, they’re going to expend resources creating a complicated regulatory framework in an attempt to neutralize the Bitcoin threat.
Here’s the good news: they’re going to fail. The technology available to us is simply too powerful.
Think about it: no matter what governments do, there’s almost always a way to defeat them thanks to modern technology.
If they try to ban the sale of firearms, we now have the ability to 3D print them.
If they engage in illegal surveillance of our emails (which they are), we have FREE, open-source encryption technology available to thwart their efforts.
If they debase their currency into oblivion and impose capital controls (which they are), we can use Bitcoin and move money into the blockchain.
And if they try to eliminate those tools, they’ll fail miserably.
Remember that a government’s power is based exclusively on threats of violence, which exist solely in the physical world.
But Bitcoin exists in the digital world where their threats of violence are useless.
There is no centralized nexus of control for Bitcoin. No individual or organization controls it. Therefore governments have no one to threaten.
That’s why they’ll fail. Our modern technology favors the individual. It favors freedom. It favors those who understand major trends and adapt to change.
[Editor’s note: This letter was penned by Tim Price, London-based wealth manager and author of Price Value International.]
“..I sat at my desk wringing my hands, transfixed by the tragic slapstick of British politics..
“We are in the biggest domestic political crisis of my life..
“This is only the second time I can remember when the normal, trivial business of office life has stopped — and stayed stopped..
“I’ve witnessed a few surprising general election results, a few terrible terrorist events, a few sporting triumphs and defeats where we stopped and gawped and worried or marvelled for a little, but it never lasted long..
“The only other time I can remember when everything ceased was after 9/11..
“Another acquaintance, who holds a senior management job at a well-known company, reported feeling so lethargic and powerless he cancelled all but the most essential meetings and sat in his office staring at the news on screen, feeling increasingly out of control..
“Instead I went to work, and read more gloom about the UK economy. Sterling falling. Buyers pulling out of the property market. Decline in new job postings. And that is before the productivity catastrophe created by all this lethargy and all-round uncertainty..”
– Lucy Kellaway, ‘Carry on Post-Brexit, whether calm or not’, The Financial Times, 3 July 2016.
Ever since The Financial Times was acquired by the Japanese in the summer of 2015, its attitude toward the Establishment (that it partly forms) has hardened into ossified, dogmatic inflexibility. I felt so disturbed by Lucy Kellaway’s response to the Brexit vote that I felt compelled to write to her:
“I’ve been reading my copy of the FT these last few weeks with a growing sense of disbelief – a sort of ‘Invasion of the Body Snatchers’ disbelief as you and your colleagues wail on about the collapse of everything you hold dear. Your piece today encapsulated that sense of rolling economic and cultural dread.
“I’m a fund manager, I live in London, I have a degree, I’m under 50 – and I voted ‘Leave’.
“Not one columnist on the paper has written in terms other than ones which are alienating, patronising, derogatory and spiteful to what I believe I voted for.
“I don’t know how often you get data about subscriber numbers but it would not surprise me if you sustain a large fall in readers when they’re next updated. I am thinking myself whether to maintain my own subscription – I don’t like paying top dollar to be insulted on a daily basis.
“If I am not representative of your “core”, who on earth can be?”
I didn’t get a response and, to be honest, I didn’t really expect one.
Two of the UK’s most influential financial journals of record – The Financial Times and The Economist – backed ‘Remain’ to the full extent of their journalistic resources, and lost. They now seem determined to talk us into recession. It would be a rather sad, pyrrhic victory if it came about.
Last Thursday, the FT’s senior investment commentator, John Authers, published a piece with the somewhat provocative title, ‘Central banks are not the enemy’. It included the following observations:
“..Trust is fragile and under attack. The urge to give the rich and powerful a hard kick links the UK’s vote to leave the EU, the nomination of Donald Trump and the rise of populist movements across Europe. Distrust of ruling elites is often justified but the breakdown in trust that is taking place today is different..”
“Monetary policy has stayed too loose for too long but that is not primarily a failure of central banks. Instead, it is a failure of politicians, who have avoided the spending commitments and deeper economic reforms, very painful at first, that would wean us off cheap money. And it is a failure of markets themselves, which freak out if denied their dose of easy money. Rather than ambitious power-grabbers, central bankers
strike me as awkward technocrats, deeply uncomfortable with the role that the abdication of responsibility by others has forced on them..
“Markets are not efficient, and are often wrong. I have made a career out of explaining this. But they are not part of a political process, and ignoring them is not an option. When they set the price at which we can borrow, or at which we can exchange currency, they create truths we have to live with. Without the basis of trust, which appears to be ebbing away, the economy loses its cornerstone. And not even all the bonds in
Christendom can rebuild it.”
The pain of the Brexit vote clearly still smarts over at Southwark Bridge. But the conflation of Brexit with the rise of Donald Trump, and European nationalism, is more than a little contentious. The philosopher John Gray has been one of the most incisive analysts of the UK’s decision to leave the EU:
“As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer.
The interaction of a dysfunctional single currency and destructive austerity policies with the financial crisis has left most of Europe economically stagnant and parts of it blighted with unemployment on a scale unknown since the Thirties.
At the same time European institutions have been paralysed by the migrant crisis. Floundering under the weight of problems it cannot solve or that it has even created, the EU has demonstrated beyond reasonable doubt that it lacks the – capacity for effective action and is incapable of reform.
Europe’s image as a safe option has given way to the realisation that it is a failed experiment. A majority of British voters grasped this fact, which none of our establishments has yet understood.”
Mr Authers is surely right to point out that politicians are also partly to blame for the current global economic malaise, in having created a policy vacuum into which central bankers have stepped, however reluctantly. But I cannot accept his statement that the markets are not now part of a political process, nor that they play any real role in setting borrowing prices, when monetary policy and effectively all of the yield curve is under central bank direction. Most frustratingly, he does not choose to follow the trail of breadcrumbs in his argument to an existential question about the validity of central banking itself. So I decided to write to him, too:
“I hope this finds you well.
“As you rightly suggest, social media exchanges tend rapidly to become tribal and divisive, which is why I am writing to you privately in response to today’s piece ‘Central banks are not the enemy’.
“According to the Bank of England’s website, its mission is “to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.” How well they have delivered to this mandate since 2007 I will let you assess.
“In the light of this presumed objective, you may find the following note to one of my publishers interesting:
“I’ve been following with interest your, Bill Bonner’s and Jim Rickards’ exposure of fake money. First let me say that I totally agree with everything you have all written. I thought you might be interested in a concrete example.
“In 1971, as Nixon was embarking on his great economic experiment, my wife and I were in the process of buying our first house, a newly built three bedroom semi. As Warren Buffett remarked, “Price is what you pay, value is what you get.” Everything that can be reasonably described as capital has an intrinsic value. The intrinsic value of that house was that it provided a comfortable home for a young family. It was large enough to not feel claustrophobic. It had some private outside space, a drive on which you could park two cars and there was enough room to build a garage, although we couldn’t afford to do that. It was in a pleasant and safe environment with all amenities you would need, e.g. schools, doctors, a pub, an off-licence etc. That house is still there today. Its intrinsic value is pretty much the same today as it was 45 years ago. Perhaps a little less if its state of repair has deteriorated over the years or possibly a little more if the owners have added to it but no significant change.
“Money has no intrinsic value only extrinsic value. The value of money is simply what you can buy with it. In 1971 the house we bought cost £4,000. Today the same house would sell for about £200,000. That is an increase of a factor of 50 in 45 years or about 9% per annum. We tend to call this “inflation” but in reality it is “debasement of the currency”. How can we distinguish between the two? If I had bought the house in 1971 using gold I would have had to pay about 140 oz. If I wished to buy it today in gold it would cost me 190 oz. Given that the exchange rate between gold and fiat currencies has been manipulated to a low value over quite a long time span the price of the house in gold has hardly changed. If gold reaches £1,428 per oz in the not too distant future, which is a conservative estimate if you listen to Jim Rickards, the price will be identical in gold terms. Gold is a currency that can’t really be debased.
“You wouldn’t need to go far back in UK history to find a time when the punishment for debasing the currency was hanging and drawing. I believe it didn’t include quartering although I might be wrong. Perhaps reintroducing this punishment might concentrate the minds of those that dictate economic policy.”
The rest of my text to John Authers follows:
“You are right to suggest that central bankers are filling a void left by politicians. What concerns me is whether the institution itself is required, and whether, in the process of attempting to “maintain monetary and financial stability”, it is, in fact accelerating the destruction of all remaining faith in our monetary system.
“We allow markets to operate in just about every area of the financial system EXCEPT the setting of interest rates, which remains the exclusive privilege of the Bank. We are led to believe that a narrow clique of unelected technocrats led by a serial inflationist knows more about the economy and the 64 million people operating within it than those 64 million people themselves. We now face the prospect of the introduction of negative interest rates – a concept which I doubt even exists in most economics textbooks. If the Bank is trying to precipitate a) a run on the banking system and / or b) a run on the currency, it is certainly going the right way about it.
“By controlling interest rates and having facilitated QE, the Bank has undoubtedly affected both short term rates and bond yields. By impacting bond yields it is indirectly affecting equity prices too – no market is an island independent of other asset classes entirely. In a world of negative interest rates, savers and pensioners face an awkward choice between seeing their capital slowly evaporate in both real and nominal terms, embracing the credit, the derisory yield on offer, and the inflation risk of bonds, or risking their capital in an equity market arguably boosted unnaturally by QE and the distortions it has wrought elsewhere.
“At what point does the FT question whether the very concept of a central bank is fit for purpose any more? If Mark Carney and the MPC aren’t the enemy here, who on earth is? The experiences of Nazi Germany, Soviet Russia and Communist China showed the “demerits” of central planning. Why should we allow it to persist in our monetary system? If Government insists on maintaining a monopoly on the issuance of money, the very least it can do is protect its purchasing power. We are sleepwalking towards a religious experience for investors, and not, I suspect, in any good way.”
At the time of writing I had not received a response but, again, I didn’t really expect one.
It all started with 9/11.
After the twin towers fell in 2001, the US government sprang into action to wage the global war on terrorism.
Within days following the attack, Congress pushed through the USA PATRIOT Act, providing unprecedented authority to the US federal government.
The legislation also gave several government agencies sweeping powers over the US banking system. And they made an important discovery.
You see, the entire world relies on the US banking system… at least for now.
The US dollar is still the world’s most dominant reserve currency.
Oil contracts around the globe from Iraq to Indonesia are settled in US dollars.
Foreign governments and central banks hold US dollars as their reserves.
And the US dollar is widely used in global trade. When a Vietnamese manufacturer sells to a Ukrainian wholesaler, that deal will transact in US dollars.
This widespread use of the dollar means that the US banking system is essential to global commerce.
International banks must have access to the US banking systems so that they can transact in US dollars.
Being shut out of the US banking system would be disastrous for a foreign bank because they’d no longer be able to do business in US dollars with the rest of the world.
This gives the US government enormous leverage over global banks. And they realized this in 2001.
Uncle Sam wanted foreign banking data in order to follow the money and track terrorist financing.
So they demanded all sorts of information from foreign banks, threatening anyone who didn’t comply with being kicked out of the US banking system.
The banks complied. And the US government immediately saw how powerful this threat could be.
In 2010, as the dust settled from the 2008 crisis, they used this threat again.
This time the legislation was called the Foreign Account Tax Compliance Act, or FATCA.
FATCA was passed because the US government realized they were flat broke.
Desperate to find every penny they could get their hands on, FATCA commanded every bank in the world to share information with the IRS.
The idea was to track down illicit funds from Americans who were evading taxes and hiding money overseas.
The US government thought that FATCA would generate hundreds of billions of dollars in new tax revenue.
It didn’t. Official estimates show that FATCA brings in between $250 million and $800 million per year in additional revenue.
That might sound like a lot, until you consider that the cost of implementing such onerous legislation have been estimated as high as $1 trillion.
In 2013 the UK government determined that the cost of implementing FATCA just for British businesses would run into the billions of dollars.
So, financially, FATCA is a pitiful failure. The costs of implementing it far exceed the any benefits.
But what’s even more important is that FATCA destroyed global banking.
For example, many countries have strict banking privacy laws that forbade them from sharing their customers’ information.
But that didn’t matter to Uncle Sam.
Even if a bank would be violating its own local laws by complying with FATCA, the US government still threatened to kick them out of the US banking system.
The US even destroyed a few banks along the way just to set an example of what would happen to dissidents.
As the years went by, the US government continued to leverage this threat to get whatever it wanted from foreign banks.
In 2015, the US government levied a $9 billion fine against French bank BNP Paribas for conducting business with countries that the US didn’t like (Cuba, etc.)
Of course, BNP Paribas wasn’t violating any French laws. But that was irrelevant.
The US government still fined BNP and threatened to kick them out of the US banking system if they didn’t pay.
This has become standard practice in the Land of the Free. Whenever the US government needs money, they just fine and threaten everyone.
In fact, global banks have shelled out over $200 billion in fines over the last six years.
These constant threats have created an environment where banks are scared to do anything.
They’re all terrified of the US government; no one wants to be the next bank that gets fined billions of dollars or kicked out of the US banking system.
Doing any business at all means risking the ire of the US government.
So rather than facilitating commerce and responsibly managing people’s savings, banking is now about compliance, bureaucracy, suspicion, and innuendo.
The simple act of opening a bank account is fraught with difficulty and obscene amounts of paperwork.
And when you walk into a bank there is an automatic presumption that you are some criminal money laundering tax evader.
If you want to test this assertion for yourself, try withdrawing $10,000 in cash and see how they treat you.
Even simple transactions are held up by droves of unnecessary obstacles and paper-pushing bureaucrats who domineer over your savings like Dark Lords of the Sith.
This has been toxic to global commerce.
But finally there’s at least one jurisdiction that’s said, “enough is enough.”
No surprise, it’s Hong Kong, one of the more economically free places in the world.
Hong Kong already has one of the safest, most liquid and well-capitalized banking systems on the planet.
(My analysts recently performed an independent stress test for our premium members that showed Hong Kong banks easily withstanding catastrophic financial conditions…)
Hong Kong’s Monetary Authority has decided that it will no longer live in fear of Uncle Sam and is now leading a rebellion against US government financial servitude.
They’ve just announced new guidelines to make Hong Kong, once again, one of the easiest and best places in the world to bank.
And those guidelines will specifically include simplified account opening procedures for foreigners, foreign businesses, and even startups.
This is great news. More to follow.
Another 508 people renounced their US citizenship last quarter according to documents published this morning by the Internal Revenue Service.
This brings the total number of US ‘renunciants’ under the Obama administration to 17,359.
It’s a pretty sad state of affairs when a government’s tax policy is so oppressive that it drives people to permanently divorce themselves from their country.
Now, it’s easy to dismiss these people as traitors and cowards, and to say “good riddance, we didn’t want you anyhow.”
But consider that many of these renunciants are what I call ‘accidental Americans’.
This could be someone born in, say, Thailand, to an American father and Thai mother.
Automatically at birth, the child is a US citizen due to his father’s nationality.
He grows up in Thailand for his entire life, barely ever setting foot on US soil.
He goes on to have a successful life, until, one day, he receives a ‘Dear John’ letter in the mail from the US government congratulating him on all his success.
“And oh by the way you owe us 20 years of back taxes.”
This has happened countless times. That’s because the United States is almost the only country in the world that has what’s called “citizenship based taxation”.
In other words, if you are a US citizen, you are required to file tax returns and pay tax to the US government, regardless of where you live, even if you are an accidental American who has never even been to the United States.
This isn’t normal. Most countries have ‘residency based taxation’ where they tax people based on where you live.
Here in Italy, for example, the Italian government (even as bankrupt as it is) only taxes people who actually live here.
For Italians living abroad (and who don’t have any Italian-sourced income), they don’t pay a single euro in income tax to the Italian government.
Residency-based taxation is a more sensible approach.
But in the Land of the Free, the government demands payment from all Americans, no matter where in the world they happen to live.
There are certain credits for foreign taxes paid, and exclusions like the Foreign Earned Income Exclusion.
But anyone earning income beyond the exclusion amount still owes tax.
Plus anyone earning investment income like capital gains, dividends, interest income, etc. still has to pay tax on those earnings without any exemption whatsoever.
Think about that. You’ve never received a dime of benefit or government service. And yet you’re still expected to pay up, along with all sorts of penalties and interest.
What’s really amazing is that when these accidental Americans get fed up and renounce their citizenship to put a stop to this madness, they aren’t allowed to do so until they settle their tax bills.
Many of these people never lived in the US, never worked in the US, never agreed to pay any tax…
Yet they’re not even ‘allowed’ to renounce until they pay off the federal government.
This is extortion, plain and simple.
Funny thing, solvent governments don’t engage in this type of behavior.
You don’t see Hong Kong devouring its own people through oppressive taxation that drives them to relinquish their passports.
On the contrary Hong Kong’s taxes are so low that they’re attracting talent and business.
Bankrupt governments, on the other hand, routinely resort to this type of financial cannibalism.
History is replete with cautionary tales of insolvent governments who plunder the wealth of their citizens in order to maintain the status quo.
So as western governments continue their grueling slide into insolvency, this is a trend that all of us will eventually face.
Yes, we can be grateful for the opportunities that have been afforded us by our nationalities.
But that’s no reason to lie down and be fleeced so that a government with a track record of wasteful, destructive spending can steal your wealth to drop bombs on children’s hospitals on the other side of the world.
Bottom line: they’re coming for your money at some point in the future.
It’s important to understand this reality, and have a plan to ensure you don’t become another statistic.