Casey Research recently published an article entitled, “Capital Controls Are Coming”—but are they really?
In fact, some capital controls already exist as restrictions on how much cash you can take out of the country. These capital controls exist at our physical and financial borders and concern international movement of dollars.
Other capital controls exist domestically. I.e., you can’t deposit more than $10,000 into bank accounts in the U.S. without causing your bank to send notice to the national government.
Until A.D. 1934, we had $500, $1,000, $5,000, and $10,000 bills in circulation. Now, the biggest bill we can use is $100. That’s evidence that currency controls have been with us since A.D. 1934.
Article 1.10.1 of the Constitution of the United States (A.D. 1788) declares that “No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts”. That’s a form of “money control” that amounts to “currency control/prohibition”. Currencies other than gold or silver are prohibited or at least restricted within the States of the Union.
My point is that some form of “currency controls” have been with us for over 200 years. I doubt that you can find a nation anywhere on earth that hasn’t engaged in some form of “currency controls” over the past century.
Given that some currency controls are already present and widespread, the Casey Research article might better have been entitled “Draconian Capital Controls are Coming”.
While Casey Research implicitly argues that “Draconian Capital Controls are Coming,” I’m writing this article to present reasons why draconian capital controls are unwise, counter-productive and, although possible, unlikely.
Draconian Capital Controls Inevitable?
According to the Casey Research article,
“The [currency control] carnage always comes by surprise, often on an otherwise ordinary Saturday morning. The government declares a surprise bank holiday. It shuts all the banks. It imposes capital controls to stop citizens from taking their money out of the country.
“At that point, the government is free to help itself to as much of the country’s wealth as it wants. It’s an all-you-can-steal buffet.
“This story has recently played out in Greece, Cyprus, Argentina, and Iceland. And those are only a few recent examples. It’s happened in scores of other countries throughout history. And I think it’s inevitable in the U.S.”
Sudden increases in capital controls may be surprising. But, given that currency controls have been around since the beginning of our country, they are not inherently surprising. They are mostly taken for granted and so commonplace as to be (mostly) unremarkable.
If scores of some countries have suffered draconian currency controls, it’s also true that scores of other countries have not. The fact that currency controls have been imposed in some countries does not make draconian currency controls “inevitable” for the U.S..
Here’s the Casey Research article’s fundamental argument:
“I believe the U.S. dollar will lose its role as the world’s premier reserve currency. When that happens, capital controls are sure to follow.”
Are capital controls truly “sure to follow” if the dollar loses its role as “the world’s premier reserve currency”? The logic of that argument may or may not be valid, but I doubt that the premise—that the dollar will lose its status as “the world’s premier reserve currency”—will happen anytime soon.
The Casey Research warning is a little like arguing, “If a meteor the size of Texas hits Manhattan, then New York’s state economy will suffer a serious decline.” Well, yeah, that’s technically true—but what are the odds that: 1) there’s a meteor the size of Texas; and 2) it will soon hit Manhattan? Not very high.
Likewise, what are the odds that the dollar will continue to exist but nevertheless shed its role as “premier reserve currency”? Also, not very high.
If the dollar dies, it will also lose its role as “premier reserve currency”. There’ll be new “currency controls” on whatever new currency takes its place.
But, so long as the dollars exists, it will remain a (not the) “premier reserve currency”.
Because . . . .
No Single Replacement Currency Is Available
If the dollar lost its role as “premier world reserve currency,” some other currency would have to take its place.
What alternative currency could currently replace the dollar?
The Chinese yuan? China’s up to its egg rolls in chaos. Barring the unforeseen, the world may continue to accept the yuan as an alternative to the dollar in some transactions. However, the world won’t accept the yuan as a universal replacement for the dollar anytime soon.
How ‘bout the euro? So long as the EU remains economically and politically unstable, could the euro replace the dollar as “premier world reserve currency”? No.
OK—what about Special Drawing Rights issued by the IMF? Nothing’s impossible, but that proposal strikes me as unlikely. If the fiat, debt-based dollar issued by the Federal Reserve fails, will the world accept replacement by another fiat, debt-based currency just because it’s issued by the IMF? It could happen, but I give that proposal a chance in four of succeeding.
If there’s no credible fiat currency available to replace the fiat dollar and the dollar fails, what’s left to replace it but physical gold?
But gold is the arch-enemy of the New World Order and its central bankers. The Powers That Be may replace the fiat dollar with a gold-backed world reserve currency, but it’ll only happen at the point of a gun or in the midst of extraordinary, global chaos and desperation.
I’d place the chances of The Powers returning to a gold-based monetary system to be 1 in 4, maybe 1 in 3. Those odds aren’t prohibitive but, given that the New World Order hates gold and depends on fiat currency, there are powerful forces arrayed against gold. These forces will not voluntarily choose to replace the fiat dollar with physical gold except as an unavoidable necessity to ensure preservation of their own positions of power.
Q: If the fiat dollar’s status as “premier reserve currency” is declining, but the fiat dollar can’t be replaced by a single currency, what will we use as World Reserve Currency?
A: For the immediate future, we already have access to a variety of currencies in a constant state of flux. Multi-national corporations can choose to transact business in dollars today, yuan next week, and euros next month. Given the constant changes in the relative value of multiple currencies, profits from foreign trade may depend more on whichever currency that parties choose to use for payment than on the price of the product they’re selling.
We’re already living a world where, once again, currencies other than dollars are used in foreign trade. Where the dollar used to be “the world reserve currency” it is now only “a world reserve currency”. Even so, it’s still the “premier reserve currency” in that it’s used more than any other currency to execute global commercial agreements.
The “Premier” Reserve Currency
In the midst of our brave, new variety of currencies, the fiat dollar should remain the “premier world reserve currency” for years to come. Not because the fiat dollar is good, intrinsically valuable, or honest. The fiat dollar will remain “premier” because it’s the world’s cleanest dirty-shirt.
For The Powers That Be to maintain their power, they need a global banking system that uses just one fiat currency—and they alone must be able to control its creation and distribution. For now, there’s only one currency that more-or-less fits that description: fiat dollars. That’s the only currency that’s accepted globally by ordinary people. It’s the only currency likely to be accepted by cabbies in New York, New Delhi, and Nuevo Laredo for years into the future.
Implication: The Powers can’t dump the dollar without crashing the whole N.W.O..
Casey Research implies that so long as the dollar remains the “premier reserve currency,” draconian capital controls can’t be imposed. If Casey is correct, so long as the dollar is the only currency that can serve as “premier reserve currency,” draconian capital controls are unlikely.
• In a two-currency world (say, the dollar and the euro), so long as at least 51% of the world’s reserve currency is held in dollars, the dollar would still be the “premier reserve currency”—not the only reserve currency, but the one currency most widely used. The dollar would lose that “premier” status only if it fell to 49% of the world’s reserve currency and the euro rose to 51%.
How long do you suppose it will be before the dollar falls from 60% to 49%? It could happen, but it won’t happen soon.
How long will be before the euro not only rises, but more than doubles from 25% of the world’s reserve currency to 51%? Not very soon.
Plus, we don’t live in a two-currency world.
There are at least six or ten other fiat currencies that could (and some already do) act as additional world reserve currencies. So long as we have several world reserve currencies, the dollar’s use as “premier reserve currency” could fall to 30%, maybe less, and still retain its “premier” standing so long as use of each of the remaining world reserve currencies only represented 2%, 10%, 20% or even 29% of the world’s reserve currencies.
How soon do you expect the dollar to fall from 60% of the world’s reserve currency to 29%? It’ll take a while—and even then, the dollar will still be “a” world reserve currency.
My point is that–even if it’s true (as Casey Research contends) that (draconian) currency controls are “sure to follow” the dollar’s loss of status as the “premier reserve currency”–unless the dollar flat-out dies, the dollar won’t lose its “premier” stature anytime soon. And, therefore, (draconian) currency controls don’t seem to be likely in our immediate future.
Note that I’m not saying the dollar couldn’t fail for “natural” reasons. Some sort of unexpected and uncontrolled debt default panic might overwhelm the dollar next month or next year. I’m saying that The Powers won’t choose to voluntarily dump the dollar until there’s a viable replacement—and, for now, no such replacement is apparent.
Some currency controls apply at international borders. Under some controls, you can’t bring more than a certain amount of currency into a country. Under other controls, you can’t take more than a particular sum of currency out of a country.
Whenever currency controls appear at a nation’s geographic and financial borders, they inhibit international trade. Imagine that capital controls prevented me from moving $1 million of my personal wealth from within the U.S. borders to deposit those funds in a Swiss bank. Won’t those same capital controls also inhibit me from moving $1 million in my corporation’s wealth to German bank account to pay for thirty brand-new BMWs that I hope to sell from my domestic BMW franchise?
Clearly, capital controls can be devised that prevent the movement of personal savings but still allow for international commerce. Even so, whatever restrictions are imposed at national borders to restrict the outflow of personal savings will also inevitably complicate and at least slow the outflow of commercial funds used for international trade.
I.e., if government restricts the outflow of personal savings at the U.S. border, it would also be compelled to closely investigate the “legitimacy” of any other funds leaving the U.S. for purportedly commercial reasons. At minimum, these capital controls will slow the speed of international commerce.
Can the already-depressed global economy withstand any further restrictions on commercial trade? Probably not.
If not, can government be reasonably expected to impose (draconian) capital controls that, at least indirectly, restrict global free trade? Wouldn’t doing so be contrary to a fundamental objective of the New World Order?
What about foreign-held dollars? I’ve seen credible estimates that roughly 75% of the world’s physical, paper dollars are currently held in foreign countries. If the U.S. government imposed capital controls to keep domestic dollars within the U.S., won’t those controls also inhibit foreign-held dollars from re-entering the U.S. to be redeemed?
We can complain all we want about Chinese billionaires buying U.S. real estate on the West Coast. But the fact remains that these Chinese are bringing foreign-held currency into the U.S. economy and thereby increasing the U.S. economy’s domestic money supply. That increase contributes to inflation, resists deflation and “stimulates” the U.S. economy.
If capital controls reduce the influx of foreign funds into the U.S. economy, those controls could tend to reduce the domestic currency supply and help cause deflation.
Can the U.S. government gain enough though currency controls to justify the economic losses and possible deflation caused by the lost inflow of foreign funds?
So long as foreign investors recognize the U.S. economy as the last, best hope for preserving their capital, there’ll be a resulting influx of foreign funds into the U.S. economy. That influx could be big enough to increase the domestic currency supply, contribute to inflation, and even “stimulate” the U.S. economy. Given the benefits of currency inflow, draconian capital controls that reduced that inflow could be counter-productive.
Loss of World Reserve Status
The fiat dollar’s current perceived value is based largely on the fact that it’s still a “world reserve currency”. Can the dollar retain its role as “a” world reserve currency if capital controls prevent domestically-held dollars from leaving the U.S. economy? Can the dollar retain its role as “a” world reserve currency if capital controls inhibit foreign-held dollars from entering the U.S. economy?
So long as the dollar is still the “premier reserve currency,” that fact should inhibit the imposition of the most significant kinds of capital controls on the U.S. dollar.
Why? Because to achieve the status of a “world reserve currency,” a currency must be able to freely cross international borders with little or no interference. Once capital controls become sufficiently draconian to prevent a currency from freely crossing international borders, that currency should degrade from the status of a “world reserve currency” to that of only a “national reserve currency”. In theory, given sufficiently draconian capital controls, the world could have little more use for the fiat dollar than it has for the Algerian dinar.
It’s common knowledge that much of the fiat dollar’s perceived value is based on its status as “petro-currency” and “world reserve currency”. If capital controls caused the U.S. dollar to lose some or all of its remaining status as “world reserve currency,” the value/purchasing power of the dollar also would tend to fall. If so, why confine dollars within the borders of the U.S. economy since, by doing so, you reduce its standing as a “world reserve currency” and thereby diminish much of its purchasing power and global utility?
The value of all intrinsically-worthless, fiat currencies ultimately depends on how many people use those currencies as if they were real money. Any fiat currency’s internationally-perceived value will decline if its use is restricted by currency controls.
A dollar that can’t cross the U.S. border to be saved in a foreign country’s bank or spent in a foreign country’s economy is necessarily less useful and therefore less valuable than a dollar that can cross U.S. borders to be used by a maximum number of the world’s population.
Currency controls necessarily reduce the dollar’s usefulness. As dollar usefulness falls, so will the dollar’s perceived value.
Will government impose draconian currency controls if doing so reduces the value of the currency?
They might—but they shouldn’t.
The Casey Research article presented evidence supporting its argument that:
If the U.S. dollar loses its role as the world’s premier reserve currency, then (draconian) “capital controls are sure to follow.”
That argument might be true.
However, viewed from a different perspective, the same evidence could also support the argument that,
“If The Powers That Be cannot replace the fiat dollar as the world’s ‘premier reserve currency,’ then the probability that the U.S. government will intentionally impose draconian currency controls is small.”
In the end, draconian currency controls probably can’t be imposed on the US dollar without compromising its status as “premier reserve currency,” and thereby inhibiting global free trade. So long as that’s true, additional draconian currency controls aren’t impossible—but they are unlikely.