Financial Repression Starts Showing Its Ugly Head

2013 is proving to be a hallmark year in the ongoing saga which is called “economic recovery.” If anything has started to become blatant, it is undoubtedly the distortion in money, markets and metals.

During the first years after the financial crisis of 2008, the markets reacted in line with what one would expect from additional liquidity: stocks recovered from the crash, interest rates were pushed down, most commodities have gone up, and precious metals were the best performers. Most currencies have been whipsawing.

Although a range of interventions with exotic names have been invented by the creative directors of Western central banks, our belief is that the full effects of those measures have only started to manifest themselves in 2013. With the end of the year in sight, this year will go into history marked by a historic crash in precious metals, an epic surge in interest rates, US equities all time highs and European and Japanese stock markets surging the wall of worry. Courtesy of the central banking liquidity injections, interest rate manipulations, and, most likely, repeated efforts by the Protection Plunge Team (PPT).

We would like to draw the attention to the importance of interest rate distortion. Not only is the length of the suppression out of proportion, to such an extent that Jim Rickards is totally convinced it is the proof of an economic depression. Besides, there is also a big risk on destructive effects on the economy. During a recent presentation at the Casey Summit in October, Don Coxe compared the interest rate suppression with a wounded soldier. In the army, in the early days, dying soldiers were given heroin. It was the only solution to ignore the pain. However, the crucial part was the timing of withdrawing the heroin. Withdrawing either too fast or too late could have catastrophic results. Knowing when exactly to switch to pain stilling morphine was crucial.

Similarly, zero percent interest rates could be considered financial heroin. The US Fed Chairman experienced it the hard way when his announcement of a potential withdrawal had immediate and destructive effects in June.

Financial repression in 2013

Given the track record of central planners in forecasting (or lack thereof), one could expect that the world is about to experience the destructive effects of financial heroin withdrawal. But what is at risk if things do not work out as engineered by central planners? The short answer, in our view, is financial repression. The following examples provide sufficiently evidence.

Financial repression has truly shown its face in 2013. The year started with an epic event: a bail-in of major banks in Cyprus which laid the foundation of a bail-in template (recently released by the BIS).

Poland saw a major restructuring of its private pension funds; the funds were nationalized overnight. One could call it “pension fund confiscation.”

The Detroit bankruptcy was another major development. Recently, it became clear that pensioners, retirees and other unsecured creditors would undergo a 84% haircut on each dollar (source).

One of the newest inventions in the financial world in 2013 was “bank bail-ins.” The term achieved the status of a commonly accepted buzz word in a very short period of time. In its latest update, Taki Tsaklanos from Gold Silver Worlds discussed several recent cases which provided proof of the bank bail-in rumble growing louder. He also explained that bank bail-ins are the result of extreme banking leverage; excess liquidity provided by the central banking corporations do not prevent bank bail-ins, they feed them.

The 10% savings cut proposal by the IMF for European households has luckily not been implemented [yet?], but the fact it is openly being discussed as an idea is worrisome to say the least. In our view, it deserves adding it to our list as it is an indication of coming major unexpected measures. From the IMF paper (page 49):

“The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair). … The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away. … The tax rates needed to bring down public debt to precrisis levels, moreover, are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.”

Capital controls

And then there is the other category within the financial repression cloud: capital controls.

A couple of weeks ago, Chase Bank sent out a letter to some of their small business accounts telling them their cash and wire transfer activity would be limited (source). The letter circulated on the internet, and was initially considered a measure of capital control applicable to all Chase Bank customers. We reached out to the communications department of Chase Bank, who replied that the measure was wrongly interpreted. From the answer, it appeared that the decision was affecting only a small group of customers; the impacted clients would have alternatives for international wires. Interestingly, those alternatives were not mentioned in the letter. In line with this reply, a US based law firm in our network concluded, after investigation, as follows: “Although there was initial cause for concern, Chase is still allowing its clients to send international wires – albeit with more restrictions than in the past.”  Be it as it may, there is a smell to this.

Coincidence or not, some days later, Texas Western Union announced that, due to new regulations, effective October 1, 2013, “the international Western Union wire transfer service will no longer be available. The domestic service will remain unaffected. The credit union’s outgoing international wire transfer fee will be $60.00/transaction.” (source)

Historic evidence

Hm. One could rightfully ask if this is a trend. In our view, the short answer to that question is “yes, very very likely.”

Another way to look at the question whether we are in a trend, is to check what we can learn from history when it comes to financial repression and capital controls. Ronald Stoeferle points out in his latest “In Gold We Trust” report that the post-war period in the US was the standard example of financial repression. “With so-called ‘Regulation Q’, interest payments on demand deposits were prohibited, international capital movements strictly regulated. Moreover, liquid short term bonds were exchanged for illiquid longer term ones.” There are several parallels to present times.

Stoeferle continues by laying out the differences between the post-war period of financial repression and the current situation. Although public debt was far higher in the post-war period, private households, banks and corporations were barely indebted at the time. Today, a “twin deleveraging” would be hyper-deflationary. Moreover, the real economy at the time profited from the enormous investment activity in the course of reconstruction, urbanization, trade liberalization and demographic conditions.

One should realistically expect that financial repression in all its different facets is going to gain increasing importance in the coming years, no matter if it is not a constructive long term strategy. The truth of the matter is that it will only achieve redistribution and a temporal delay, but no solution to the problem.

Seeking protection

Going forward, how can one protect against these terrible measures? There are a couple of actionable solutions next to being hopeful. First, converting part of one’s assets into physical precious metals is a wise thing to do given that they are outside the banking system. Paper gold and silver investments like ETF’s, certificates, options, futures, and mining stocks, are risky investments, not matter if they are considered “gold investments.” The real “gold investment” is one that overcomes counterparty risk. Global Gold, part of the BFI group, is offering such protection with ultra safe storage in jurisdictions like Switzerland, Hong Kong and Singapore.

Furthermore, when it comes to banking, one could consider opening up an offshore bank account, provided it is with a reserve bank (meaning that the bank is making no loans at all). Europac Bank, founded by Peter Schiff, was designed to provide an answer to the leveraged banking industry. The bank account can be used as savings and checking account; hence it is suitable for every type of financial transaction. Optionally, the bank account comes with a debit card in gold or silver: account owners can opt to convert their money into gold to preserve the purchasing power of their currency.

Lastly, international diversification of assets is a recommended tactic. Specifically for high net worth individuals, BFI Wealth provides custom advice and wealth management solutions. Ask an advisor how the company could serve you.

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