The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”
100 dollar bills

Capital Controls

Excerpt from an article by Dr. Steve Hanke of John Hopkins University:

Capital controls as a panacea for economic ills are nothing new. Their pedigree can be traced back to Plato, the father of Statism. Inspired by Lycurgus, the tyrant of Sparta, Plato embraced the idea of a non-convertible currency as a means to preserve the autonomy of the state from outside interference.

Before more people come under the spell of capital controls, they should reflect on the following passage from Friedrich Hayek’s 1944 classic, The Road to Serfdom:

“The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.

Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape — not merely for the rich but for everybody.”

The imposition of capital controls leads to an instantaneous reduction in the wealth of the country, because all assets decline in value.

Full convertibility is the only guarantee that protects people’s rights to what belongs to them. Even if governments are not compelled by arguments on the grounds of freedom, the prospect of seeing every asset in the country suddenly lose value as a result of capital controls should give policymakers pause.”

These thoughts are very similar to ours.  The current agenda in Europe and the US is to eliminate the larger denomination currency. In the US it’s the $100 bill, and perhaps even the $50. This is designed to prevent people from transporting large amounts out of the country. It’s a form of capital controls.

The powers behind the scenes have figured out that the destruction of the value of currencies is a certainty, just a matter of time when it decelerates downward. At conferences in the late 1970’s we used to debate that the dollar would be called in, or be destroyed, etc. leading to imminent hyperinflation. We said ‘no,’ the conditions were not ripe for that.

Today we say, “The conditions are very ripe for that.” We don’t see any way out for the central bankers to undo all the damage they have done with QE and now NIRP.

Ancient Rome is a good example. When the income of the country diminished and expenses soared because of Senators basically buying votes with “free” goodies (like Bernie), the silver content of the coins had to be reduced, from about 98% to eventually 2%. It didn’t happen overnight.

Share of silver in romain coins

However, today everything happens much faster. The world is connected. If a major bank in Argentina has problems, the world knows it within minutes.

The powers behind the scenes in the EU and the US are already planning for the inevitable. This is a topic we will discuss in future issues of our WELLINGTON LETTER on a continuing basis, and how you may try to protect your assets.