Capital Controls Are Coming

June 16, 2003 – The headline of the May 30, 2003 issue of The New York Times blared “U.S. Cautiously Begins to Seize Millions in Foreign Banks”. It was frightening headline, as was the story itself. The federal government was seizing millions of dollars from foreign banks solely because the feds said it was “ill-gotten money”.

No warning. No due process. More of same the guilty-until-proven-innocent doctrine practiced by the feds in recent years. It is just one more sign of a government completely out of control.

The feds routinely confiscate millions from US banks, for alleged IRS violations, RICO seizures, etc. So some may argue, why should foreign banks be any different? More importantly though is the question, why are the feds even seizing property without due process of the law? The NYT completely ignored that question.

The nearly complete disregard for private property in the US is alarming. Private property is the cornerstone of the Constitution and a fundamental building block for the rule of law. The abandonment of respect for private property goes a long way to explaining the lawlessness of the federal government. But I’m not going to write about the political and social implications of fascism in D.C. It’s the market impact from federal action that is of concern to me and is the focus of these letters. And clearly, that impact is bearish for the dollar. Why would foreign banks hold dollars if they are subject to seizure?

So is anyone surprised that the Dollar Index closed Friday at a new 4-year low? The ongoing death spiral in the US dollar continues. There was though a very brief respite for the dollar since my last letter.

The dollar didn’t bounce, but it did stop falling for a couple of weeks. It therefore temporarily put on hold the projected 10% decline in the dollar I said to expect in Letter No. 324. So far, we have seen about one-half of that projected decline. Further dollar weakness is coming, but in order to put the weak dollar into perspective, I am presenting an important long-term chart of the Swiss franc that is telling an interesting story.

I first presented the accompanying chart back in Letter No. 286 (June 25^th, 2001, “Last Man Standing“). The Swiss franc had closed that week at Sfr 1.7974, and that level proved to be its peak. The dollar has been weakening ever since, but what is of importance are a couple of worthwhile observations and projections that I made in Letter No. 286.

First, it was by no means certain that the Swiss franc was going to form the head-and-shoulders pattern that we can now see so clearly on the chart. Only the left shoulder and head were in place at that time, but I said that if it the pattern does form it “has negative long-term implications for the Swiss franc“.

Second, I drew a possible right shoulder on that chart and said that the target for the bottom of the right shoulder “is the Sfr 1.30-1.20 area“. I’ve continued to stay with that target ever since. The Swiss franc recently touched Sfr1.27, so for all practical purposes my target has been met. What’s next?

To answer that question, I would like to again refer to my conclusions from Letter No. 286. I said back then:

“There are many reasons not to hold the US dollar, but as we have seen, there are just as many reasons – and perhaps even more in some cases – not to hold the currency of other countries as well. All national currencies impose risks on the holders of those currencies, but for now, most of the world has opted for the US dollar. It is the ‘last man standing’ in a world flooded with fiat currency, which begs the question why hold fiat currency in the first place?

There is a worthwhile and sensible alternative, namely gold, and specifically GoldGrams. Given the relative risks and the potential rewards, GoldGrams are the safe way to go for now for your core currency holding, namely, that money for which you need for liquidity and with which want to take little risk.“

We already know that the dollar-bubble has popped. For this reason, I have been warning readers to expect the collapse in the US dollar that is now well underway. But there is more to come, and that why The New York Times article is so important. It provides more evidence to what depths the feds are willing to probe in order to serve their own purposes. And as the dollar continues to collapse, it seems clear to me that they are going to confiscate ever more private property. How will they do this?

Capital controls. The feds will in time restrict the free flow of dollars out of the US. They will impose some form of foreign exchange control in order to keep the massive amount of US dollars that have accumulated overseas from being used to purchase US property. Also, the feds will prevent your dollars already within the US from being converted into foreign currencies and probably gold. It is confiscation of private wealth.

You say it will never happen? That’s what nearly everyone said in 1932 and early 1933 when some people began to worry that a gold seizure was likely under Roosevelt. In fact, Roosevelt himself said during his campaign that he would not seize anyone’s gold. But if you believed what he said, look where that would have put you instead of acting prudently by removing your gold from the banks. Now flash forward to the present.

Do you want to leave your gold and dollars in US banks and have that wealth confiscated by fascists in D.C.? Or is it prudent to remove your wealth from US banks and place it out of reach from the feds? Now ask yourself the same questions about your stock brokerage account and any other financial asset you hold in the US. The feds have their eye on your private property.

I have repeatedly stated in these letters that the dollar is in its death spiral. All fiat currencies die. It’s just a matter of time, and the dollar’s time is I expect 2004. Act now to protect yourself.

Buy gold first and then foreign currencies as a diversifier, and keep this wealth outside of the US banks or foreign banks that do business in the US. If you don’t, it is subject to confiscation by the feds, an action that will not, as they claim, help the dollar. Capital controls will only hasten its demise.