hedge against U.S. inflation
by John T. Reed
I have come to believe in 2011 and 2012 that some foreign currencies probably will provide protection against U.S. dollar inflation. Originally, I thought the interconnectedness of other economies with the U.S. through international trade and the fact that the U.S. dollar is the world’s reserve currency would mean that all currencies would inflate if the U.S. dollar inflated.
I now believe that although all economies around the world would be adversely affected by any financial crisis in the U.S.—and many currencies—not all foreign currencies—would inflate because the U.S. dollar did.
I wrote a several web articles on which few countries offer sound fiscal policies, financial freedom, welcome Americans, and have high integrity ratings.
There are several layers of considerations:
• how the assets would be treated if you went bankrupt
• whether the U.S. government could order the asset forcibly converted back into U.S. dollars
• whether you have to notify the U.S. government that you own the asset
• whether you can use the asset to buy stuff after the ’flation hits the fan
• income tax laws in the foreign country
• counterparty risk
BankruptcyGenerally, your foreign currency would be grabbed by your creditors if you went bankrupt, unless it was in a pension account [IRA, SEP, 401(k)] in Everbank. if any creditor obtains a judgment against you for non-payment of a debt, regardless of whether you have declared bankruptcy or not, they can depose you under oath and demand that you disclose all your assets and income worldwide.
Forcible conversion back into U.S. dollarsIf you hold foreign currency in a bank account within the U.S., the U.S. government is likely to order that bank to convert it to U.S. dollars, at a below-market-value rate if we get hyperinflation. That is a standard government misbehavior during hyperinflation. The U.S. government did that with gold bullion in 1933. That is, they ordered all residents who owned gold bullion (gold other than artwork, jewelry, and rare coins) to sell it to the Federal Reserve bank for $20.67 per ounce, which was less than market value, within about 60 days of the order (Executive order 6102 BY FDR). Everbank’s boilerplate in their account information warns this may happen to your foreign currency account in their bank. See also Executive Orders 11051, 11490, and 11921.
Whether you have to notify the federal government of the foreign currencyIf the account exceeds $10,000 during a calendar year, you have to file Form TD 90-22.1 with the Department of the Treasury. If, on the last day of the year, you have more than $50,000 (single) or $100,000 (married filing jointly) in a foreign account, or if the amount exceeds $100,000 (single) or $150,000 (married filing jointly) on any day of the year, you also have to file Form 8938.
But that would not apply to Everbank accounts because they are not “located outside of the United States.” I presume, however, that Everbank would have to notify the U.S. government, perhaps on an ad hoc basis, of your account holding foreign currency. In the event of U.S. dollar hyperinflation, the government would probably order forced conversion of all Everbank foreign currency accounts so it would not matter much whether they knew your name and account details.
Forced conversion of your foreign currency into U.S. dollarsForced conversion of your foreign currency into U.S. dollars nullifies your protection against U.S. dollar inflation. And there is no benefit whatsoever for having it in the account for years before the forced conversion. Owning foreign currency is like having a fire insurance policy on your home. Owning it in a U.S. bank is like having a fire-insurance policy on your home that can and will be canceled so you cannot file a claim if there is ever a fire at your home. The only day that matters in the day you file the claim—in the case of using foreign currency to hedge against inflation—the day you try to use the foreign currency to buy something for market value with it. It if is not there on that day, it never did you any good.
Not required to notify U.S. government of the contents of a safe deposit boxYou are not required to notify the U.S. government of foreign currency in a safe deposit box or elsewhere in the U.S. or in any other country. Only foreign “accounts” must be disclosed. True, such would not earn any interest, but not much interest is being paid anywhere in the world these days on “safe” passively-managed accounts. General government orders that all U.S. residents must sell gold, silver, or foreign currency to the federal government would probably cover the contents of safe deposit boxes, as well as mattresses, piggy banks, and buried jars in the back yard, within the U.S., however there are privacy and Fourth Amendment issues.
Many believe that during the Great Depression the federal government generally forced Americans to open their safe deposit boxes in front of federal agents. They did not. That is an urban legend. The Wikipedia write up on Executive Order 6102 has a subhead titled “The myth of a safe deposit box seizures order.” Such openings could happen on an ad hoc basis if the government could show probable cause of a law violation and thereby get a judge to issue a warrant to open the box in front of federal agents. But the Constitution prohibits fishing expeditions that search persons or their private possessions without probable cause.
Whether the U.S. government could or would try to force a U.S. citizen to open a safe deposit box in a foreign country is beyond my expertise. I would expect that a creditor who had a court judgment against you could jump through enough hoops that would enable them to convert that judgment into a foreign one in some countries. And the IRS has had some success getting foreign tax havens to divulge account information about Americans. But note that the IRS deals with income, not net worth, wealth, or assets, unless they have a judgment to collect back income taxes. Actually getting a U.S. citizen to open his foreign safe deposit box in another country sounds like it might be beyond U.S. law jurisdiction or capability other than in extreme cases like national security or huge amounts of money like a Bernie Madoff-size crime.
Can you USE foreign currency after the ’flation hits the fan?Foreign currency inside a safe deposit box in the U.S. would escape instant forced conversion by the bank the way Everbank warns they might have to do. But then what? If you take it out and try to spend it, there would likely also be a new order or law saying that no one could possess, import, export, spend, or accept foreign currency within the U.S. other than certain licensed exchangers who could deal only with persons entering the U.S. from overseas or leaving the U.S. to go overseas.
Could you just take the foreign currency out of your U.S. safe deposit box and carry it across the border to Canada or through customs at a U.S. international airport to travel to a foreign country and spend it there? Almost certainly not. U.S. customs would stop you and confiscate your foreign currency. Once they impose capital controls, they typically cover bringing foreign currency into the U.S., taking it out, possessing, spending or receiving it here. Generally, capital controls force all U.S. residents to sell all their foreign currency to the U.S. government for less than market value and that means you cannot pay it to anyone but the U.S. government and you cannot take it out of the country or bring any into the U.S.
What about foreign currency that you have in a safe deposit box in a foreign country? You could probably go to that country, take it out and spend it or convert it to another asset form without anyone bothering you—unless the country in question also had capital controls for whatever reason. So putting currency of countries A and B in a safe deposit boxes in country C does not diversify you away from risk of hyperinflation in country C because the currency of A and B are trapped in C where they are contraband that cannot be possessed, spent, accepted, imported, or exported.
Fundamentally, whether you use an account or a safe deposit box, it must be in the country that prints the currency in question. Foreign currency in a safe deposit box in Canada should work okay for U.S. citizens in the event of U.S. hyperinflation because it is unlikely that Canada would also simultaneously have hyperinflation and capital controls also. Unlikely, but not impossible. Foreign currency in a U.S. safe deposit box will be rendered illegal and useless by the capital controls that always must accompany hyperinflation.
Both you and the currency must be in countries without capital controlsTwo of the attractive countries, Australia and New Zealand, are far from America. Must you go to those countries to hold an account there? No. Must you go there to make use of the Australian or New Zealand dollars? No again, but two other things must be true in order for your ownership of Australian or New Zealand dollars to pay off.
• The nation where you have the account must not impose capital controls preventing your from getting your AUS$ or NZ$ out.
• The country where you are must not have capital controls preventing you from importing or possessing, etc. your AUS$ or NZ$.
For example, if the U.S. and Canada hyperinflated, and you owned AUS$ in Australia and they were not hyperinflated, you would probably be able to extract your AUS$ from any country that was not hyperinflated like, perhaps, Germany or Denmark or St. Martins, etc.
Basically, to benefit from owning foreign currency, both the currency and you must be in countries without capital controls that prevent you from accessing the account in question. If you needed to access the foreign account, that would mean the U.S. is hyperinflated which, in turn, would mean it would have capital controls. So you would have to leave the U.S. and go to a country that did not have hyperinflation and capital controls to get useful access to the un-hyperinflated currency you wisely purchased before the ’flation hit the fan.
Safe deposit boxes, by definition, require you to physically visit the nation in question. If there were only one country on earth without hyperinflation, you would need to go to that country to access and use your foreign currency regardless of whether it were in a safe deposit box or in an account.
Hyperinflation requires a capital prisonYou must understand the basic issue here. Countries hyperinflate because they can no longer borrow to pay their bills because their credit is shot—like Greece in 2012. Greece has not hyperinflated its currency because it uses the euro and therefore the Greek government lacks the power to print more of them. If Greece was still using its traditional currency, the drachma, they would probably have printed trillions of them by now and turned their country into the Zimbabwe of 2012.
If a country hyperinflates, it must also simultaneously impose capital controls to prevent citizens within the country from preferring not-inflated foreign currecy over the currency that has been inflated. Essentially, hyperinflation of the U.S. dollar requires the U.S. government to imprison the dollars of its residents and prohibit any competing currencies or gold from being used within the country.
Zimbabwe ended its hyperinflation almost overnight by simply ending capital controls. In other words, they told citizens they could use any currency they wanted, which they were already doing on the black market. Initially, however, a country trying to use hyperinflation will always outlaw possession, export, import, or use of any currency, including gold and silver, other than its inflated currency.
Counterparty riskI looked into having a bank account in New Zealand containing New Zealand. My wife nixed it. She is a retired FDIC bank examiner. New Zealand has no federal government deposit insurance. Australia also has no deposit insurance and they are the only two[url=http://www.johntreed.com/OECD countries] OECD countries[/url] that lack deposit insurance. 80% to 90% of New Zealand deposits are “Australian controlled.”
Ostensibly, that means depositors are unsecured creditors of the company that owns the bank. I’m guessing Australians and New Zealanders have figured out some way of protecting themselves from the bank failures that the U.S. had 9,000 of during the Great Depression—before the FDIC was created. Here is an article from New Zealand discussing the matter. And here is an Australian discussion of it.
I went ahead and opened the New Zealand account. True they have no federal deposit insurance. But it is also true that the U.S. FDIC has insufficient funds, its backup line of credit from the U.S. Treasury in the amount of $500 billion is a joke because the U.S. Treasury has no money, and FDIC does not insure purchasing power, which is my main fear.
Canada had no bank failures during the Great Depression. Their banking system is set up differently. Also, our Canadian bank account is insured by CDIC.
I hasten to add that neither the FDIC or the CDIC insure purchasing power. If we have hyperinflation such that a Big Mac will cost $250,000, and you had that much in your U.S. FDIC-insured account, the FDIC will make sure you get your Big Mac even if your bank fails.
CDIC does not insure accounts that have currencies other than Canadian dollars in them. Everbank says their foreign currency accounts are insured by FDIC although they point out that the coverage limit is based on the equivalent U.S. dollar conversion value of the account that was lost in the bank failure. In other words, the $250,000 FDIC limit means $250,000 in U.S. dollars. If the account were Canadian dollars and 250,000 of them were worth $300,000 in U.S. dollars, you would only get 5/6 of your money back from FDIC.
I asked Everbank what physically they would do with my money if I opened an account with, say, Canadian dollars, in it? I explicitly expressed concern that they would just keep my money in U.S. dollars then convert it to Canadian dollars when I wanted to withdraw. They said something about buying “deliverable contracts” covering Canadian dollars when I made a deposit to my account. I did not understand that, which sounded like I was trusting Everbank to do something “Canadian dollarish” with my money. Counterparty risk is the risk that you make a smart bet, but then, for one reason or another, the “casino” cannot or will not pay off when you go to “cash in your chips.”
There is no counterparty risk with regard to cash in a safe deposit box—other than stuff like someone breaking into all the boxes or the bank being physically destroyed.
Whenever you own foreign currency, you are exposed to currency risk. That is the risk that the currency you own will fall in value relative to your home currency. That risk seems remote if you only buy the currencies I recommended in the above articles: Australia, Canada, New Zealand. This is not an exact science but those countries seem pretty squared away at the present time in the financial aspects that would predict whether they would inflate their currencies. They also seem strong enough to resist outside pressure to inflate. Most of the big European countries cannot resist pressure to inflate, even if they have the character to do so, because they have too much debt.
This article may contain your future cause of financial death: ‘too much of his money was in U.S. dollars’This is an interesting puzzle isn’t it? But if you think it’s only an interesting puzzle, you are riding for a fall. As the books [url=https://docs.google.com/viewer?a=v&q=cache:pSxUj9_Bz_UJ:www.goldonomic.com/When Money dies.pdf+when+money+dies&hl=en&gl=us&pid=bl&srcid=ADGEESiCNATTIdCr-JgnyI-BL4h3ZdkKu9bS2bK8fbCfdPaw9vMlsHPayGQGn3I9adQgBAX0BiE3pkfVHn9QY086oGYUvLEd-dWjsudQ-opsRn1NVfFyw1aNZxbajTBo9dGgEskoitN4&sig=AHIEtbSl2aR4KBefgdwBj8inrCaPWjHVPA]When Money Dies[/url] and Blockade, the Diary of an Austrian Middle-Class Woman by Anna Eisenmenger the ancient silent film The Joyless Street powerfully reveal, people in a country with a hyperinflated currency will literally give almost anything for foreign currency.
Visitors from foreign countries were like zillionaires when they went to early 1920s Austria, Germany, or Hungary. In the land of the blind, the one-eyed man is king. In the land of the hyperinflation, the foreign currency owner is rich—if his foreign currency is in another country and he can to to any country that will let him access and spend it.
John T. Reed