Capital Controls are a Certainty

It's not a case of if capital controls are implemented in the US, it's a case of when. We have already seen the prelude to controls with the new HIRE Act (Hiring Incentive to Restore Employment) but please note the directive about offshore tax havens in the new HIRE Act does not mean these controls are here now.

Capital controls are implemented to effectively trap money within a country. Once this money is trapped it is then subject to tax and of course any inflation. In my view this is absolutely devastating for a countries economic health since it artificially inflates the amount of fiat money, a bit like what the US have been doing with their printing presses. Of course the poor investor whose money it is in the first place loses out completely. It is for this reason that any assets an individual has should be spread around in different jurisdictions to avoid exposure to capital controls.

The HIRE Act itself is essentially to provide incentives for employers to hire employees reducing the employment rate and it will be paid for off the back of "offshore tax evaders." Having said that the personal information which the IRS accumulates under the terms of the HIRE Act I have no doubt will be used for future capital control purposes.

So capital controls are just round the corner. This is how I see the situation unfolding.

The people themselves will want these controls.

An offshore 'situation' will be highlighted and vilified by the media.

The people will demand action to be taken by the government who will be only too happy to oblige.

This action will be the start of capital controls, subtle reforms at first, hardly noticed by the public but each one building in control and magnitude over time.

The last thing the government wants is a well informed and awake public.

The specifics of the 'offshore crackdown' part of the HIRE Act are as follows:

• If you have business dealings offshore this will greatly increase the reporting requirements, in particular for financial instruments such as annuities issued by foreign institutions. These will need to be reported on the foreign bank reporting form. This begins with the current 2010 to 2011 tax year.
• Withholding tax provisions which will not come into effect until January 2013. The main one is the 30% withholding tax on US source income which is sent to foreign institutions. These institutions are then expected to report back to the US any details of American citizens who have moved funds abroad.

As usual there is an arrogance here where the US government expects institutions in foreign countries to conform to it's reporting requirements. No doubt because of its substantial economic, political and military power. The good and bad news, depending on your perspective, is that financial institutions which were once based in New York are moving operations abroad and the US government will slowly lose its grip on the American people, however I suspect bad times are ahead and will get worse before the light at the end of the freedom tunnel can be seen.

What sort of capital controls can we expect?

• Prohibiting citizens from having bank accounts in anything other than US dollars which will have the effect of artificially propping up the local economy;
• Prohibiting money from leaving the US or taxing it when it does;
• Prohibiting residence from owning gold or sending it abroad;
• Requiring retirement plans to purchase a percentage of government bonds....we have already seen plans towards this....you can read about it here;
• A final and extreme measure would be to order the repatriation of all funds and assets (or be thrown in jail) and then completely stop cash coming in and going out of the country.

Remember the above are just a few of the capital control measures that could come into operation. It is important to take on board that there will be different levels of control, sometimes very subtle and over a period of time most people will not notice until it is too late.

It is a sad fact that people who want to maintain the purchasing power of their capital by moving it offshore will be made to look unpatriotic and be used as scapegoats for the domestic problems of the US economy. The uninformed public will then move swiftly to condemn and demand action by the government. It is the same old scenario that the politicians have been playing out for centuries. As I said above

The last thing the government wants is a well informed and awake public.

When this happens, and it will in time, just watch government fall away and people awaken to a free world where markets grow strong based on quality services and products at a reasonable price, and honesty, integrity and helping others becomes the mantra of the people.

Prepare yourself for a rough ride till that happens.