James Turk replies: I think your concerns are well founded, and you are not alone. Just this past Tuesday a top advisor to French President Nicolas Sarkozy told reporters that the US was “flooding the world with liquidity”. He went on to say: “Historically, we have only ever got out of such situations with inflation…[and]…if we lose control of inflation and there is hyperinflation, it’s a catastrophe for everyone.”
Exchange controls are also a real risk. In fact, the federal government has already imposed controls on the free-flow of capital. For example, there are various reporting requirements on how much cash one can move across borders. More importantly, the federal government has imposed so-called “qualified intermediary” requirements on non-US firms wanting access to US financial markets. Bloomberg reports that the oldest private bank in Switzerland is telling its clients to sell U.S. assets or leave. The report by Wegelin Bank explaining their decision is also worth reading.
Given the deteriorating financial problems of the federal government and the policies being pursued by the Federal Reserve, it seems likely that inflation will worsen. It is therefore inevitable in my view that the federal government will impose draconian capital controls in an attempt to keep its fiat currency game going, rather than return to sound money as required by Article I, Sections 8 & 10 of the Constitution.
To avoid the risks of inflation and government controls, I have some basic thoughts, which focus more on strategy than specific asset allocation. Also, these thoughts are of a general nature and therefore may not be for everyone.
1) The driving force in my thinking has been that I believe the US dollar (and probably the other major world currencies as well) are headed for hyperinflation. I am talking months - and not years - in the future. The US stock market is not rising because of improving economic conditions. It is rising because too much money is being created, and it inevitably ends up in stocks. A rising stock market in the face of deteriorating economic conditions (as evidenced, for example, by rising unemployment) is an early warning signal of hyperinflation. Thus, investment should be directed toward tangible and near-tangible assets as I explain below. Avoid financial assets, i.e., those denominated in currency like bank accounts, annuities, bonds, etc.
2) You should diversify your assets and get as much of your wealth as practical outside of the United States. When you are concerned about government controls, do not hold investment assets in the country where you live or where you are a citizen. It is becoming increasingly difficult for Americans to open bank and brokerage accounts in Switzerland and most financial centers, which makes it all the more important as a means of prudent diversification of one’s assets to open these accounts while you still can.
3) As noted above, I expect government controls to be imposed. Though the nature of the controls cannot be predicted, they will without doubt restrict your freedom to do what you want with your money. For this reason, think carefully about how much of your wealth is exposed to government controls and/or confiscation through IRAs, 401Ks and other deferred tax plans, as I explain in The Collapse of the Dollar. I think the risk of government confiscation is real, where the government seizes assets in deferred tax plans which it replaces with illiquid government paper (like a zero coupon 100-year maturity ‘national financial emergency’ bond).
4) I would avoid owning assets denominated in currencies. For example, bank deposits do not pay enough interest income to offset the risks. I would particularly avoid the US dollar and British pound. They are in the worst shape, but the euro is not far behind. The Swiss franc is not a viable alternative either because in a financial crisis, non-Swiss will be penalized like they were in the late 1970s with negative interest rates or some other scheme the Swiss justifiably impose to prevent hot-money from flowing into Switzerland. Also, the people who run the Swiss National Bank today are not of the same caliber of those who ran it in the 1960s and 70s, so I really wonder whether the Swiss franc will weather the storm this time around.
5) Because of the currency risk and also a real and growing default risk, avoid government bonds and bills. Because of the currency risk, I do not like corporate bonds, unless they are investment-grade rated and convertible into equities.
6) My view is that for now and the foreseeable future, liquidity should be kept in physical gold, not currencies, which in fact, has been my view this decade. Many people use the company I founded, GoldMoney to achieve this objective. The table on this page illustrates gold’s annual average double-digit rate of appreciation this decade against nine of the world’s major currencies. Gold has been far better than any currency in preserving purchasing power, and when you hold physical metal, you don't have counterparty risk - which is increasingly important these days because of insolvent banks worldwide. If you need a national currency for an expense or to make an investment, then sell gold as required. Do not own paper-gold though, and do not store the gold you own in the States because of its past history of confiscation there, though you may want a little gold or silver to keep on hand around the house just in case.
7) One should favor tangible assets that make sound economic sense (farmland, timberland, apartment buildings with inflation escalator clauses in the leases, etc) and near-tangible assets (equities of well-managed companies that produce goods and services people will want to purchase regardless what happens to the currency). Avoid financial assets of the nature explained above.
8) For investment income, look to well-managed companies that pay dividends. For example, Canadian oil-sands royalty trusts as I have been recommending are one good way to accomplish this objective. So are defensive stocks as well as the few mining companies that pay dividends.
10) Diversify the stocks you own to make sure that no more than 20% is invested in companies located in any one country.
That sums up several key areas to think about, but there is one last point, as further food for thought. Please see my article “Do You Have a Last Plane Account”.