- Capital Controls?!
by Bill Holter, http://blog.milesfranklin.com/
Since last Wednesday when word came out regarding Chase bank sending letters out to some of their business customers, we have seen the Forbes article refuting “capital controls” and also another from Fox. Both articles “say” that JP Morgan “says” these are not capital controls being put in place. They say in the Fox article that the affected accounts are internet accounts and this will help them “police” these accounts so as to speak. I looked through the news on JP Morgan and have not found any direct statement from them relating to this issue. I have also not seen any follow up letters to clients clarifying this issue…so I guess we just have to trust the reporters and take their words for it.
I mentioned Friday that capital controls are nearly ALWAYS implemented before a country devalues their currency. And that devaluation of a currency is normally “forced” on a country when they have either borrowed too much, printed too much currency…or both. In the case of the United States, we have done both and done them egregiously. Capital controls are designed to not allow capital to “get out of the way” and into safety before devaluation takes place. Implementing capital controls acts like a “fence” around a financial system and herd’s money inward and makes it difficult to escape. Think of this like a hunter or fisherman with a rifle or shotgun. If a hunter had only one shot but needed meat for the whole winter he might feed corn to gather the deer or closely in one area. In this manner he has a better chance of 2 deer lining up where one shot might get 2. Or a fisherman with a shotgun, his shotgun is of no use in the ocean but if the pond is small and with nets he can “herd” a school together…then one shot might get several fish to float to the surface dead.
I use the above “1 shot analogy” because a country that is forced to devalue has limited (maybe none) ammo left. They put themselves in a situation where the only option is to devalue or as we saw in Cyprus, “confiscate” assets balances. In my opinion there is a 100% chance that the dollar will be devalued. I have spoken many times regarding a “reset,” this is just another name for devaluation. A “reset” will also involve “re marking” the price of gold. The one single option that the U.S. has is to mark the price of gold up to a very high number. Pick one? $10,000? $100,000 or even $1 million per ounce. This would effectively re liquefy the system and make the debt already incurred of less burden…in relation to the “new found treasury wealth” of higher priced gold. This is what was done here in the U.S. by FDR when they remarked gold from $20 to $35 per ounce in 1933.
There is just one little caveat however. We must actually have the gold! If it turns out that Ft. Knox, West Point and the other depositories are either empty or the gold that is there has already been leased out so as to impair our true ownership…a reset won’t work. Hypothetically, if we have only very little gold left and if the Chinese have 5,000 tons (or probably more by now), a “reset” will not help us at all and it would make the Chinese and anyone else with real physical gold reserves the winners. In this hypothetical instance, the Chinese would then become the “financial rule makers” and we would have to play by THEIR rules.
As I said earlier, I believe that a devaluation/reset is a given and the only question l have is “when.” I feel it is safe to say that it will surely be over a weekend and the weekend may be extended a few days. Will we do this to ourselves or will it be imposed by other nations or will market forces mandate it? Obviously I don’t have the answers to this. What I do know is that over time, what is worthless will erode in value and what is valuable will seek its higher value. You must ask yourself these questions, if it is “free” to create more dollars then what is a dollar worth? If the cost of gold is $1,300 per ounce and the cost of silver is $25 per ounce to mine (and rising), what will happen to supply should their prices not rise but costs to produce do rise? This is really simple stuff and has been played out literally 100′s of times in the past. Any signs of capital controls should be what tips you off just in the nick of time that devaluation is coming. The key is to position yourself ahead of time while you can do so without the impediment of capital restrictions, for now this is still the case.