Editor’s Note: This article is intended for information purposes only. Because state and municipal laws vary greatly, as do the circumstances of individual cases, readers are advised to contact an attorney for specific legal advice. ©Scott C. Tips 2010.
Despite official government and mainstream-media pronouncements, and our own best hopes, the economy is not getting better. Rather, it balances on the precipice. The drop below us is so breathtaking that few even dare believe its depth, let alone glance down. We all hope that, like so many times before, we will tumble backwards onto solid land without falling to disaster below. But hope does not make reality. Most of us sense that we will live to see truly life-shaking changes.
Believe it or not, I wish I could write about something as relatively mundane as the next anti-whole-food-industry law coming out of Congress that will slap us hard in the face. Those are coming. But there’s a bigger problem—a huge problem—that dwarfs even those odious laws-to-be. Each and every week, right now, U.S. Treasury debt is hitting the streets at an enormous rate, $50 billion; and the countries that once so eagerly purchased that debt are now desperately trying to dump it instead.
One financial expert has estimated that in only three years’ time, the United States will owe $17.8 trillion, not including $2 trillion in GSE debt and guarantees, and another $1 trillion in combined FDIC and FHA obligations. These are not soft numbers, but hard figures that represent known maturities coming due in the short term.
At present, the federal government pays almost 5% interest on its long-term obligations. Even estimating a conservative blended borrowing cost at that same rate (far below the government’s average borrowing costs for the last thirty years) would mean the federal government must pay $1 trillion in interest payments each and every year. In 2009, all income taxes paid to the U.S. government came to $1 trillion. If our income taxes are all only going to pay debt interest, then where will the money come from to pay for normal operating expenses and the ocean of entitlements?
The Greenspan–Guidotti Rule
It should go without saying that this amount of debt is not even close to being sustainable. The by-now, widely accepted Greenspan–Guidotti rule states that a country’s cash and gold reserves should equal the short-term (one-year or less maturity) external debt, giving a reserves-to-short term debt ratio of one. Above this ratio, countries will have enough reserves to resist any massive withdrawal of short-term foreign capital. If at any time the level of a country’s hard currency on hand is less than one (i.e., 100% of its short-term debt maturities), the country will be seen as a potential default risk. History shows that countries violating this rule have inevitably defaulted on their debt.
The U.S. Treasury says it currently has about $500 billion in hard currency on hand (which takes at face value that the United States actually owns a bit over 8,000 metric tons of gold as claimed). As you can see from the previously described rule (or almost any rule for that matter), with $2 trillion in debt coming due in the next 12 months, the United States is in a short-term liquidity crisis.
Cash and Credit Expansion
Desperate for cash to pay bills and continue bribing the electorate with entitlements so they can stay in office, the politicians are hoping to stave off a default. Yet, casting around for solutions, their options are limited. The Federal Reserve can only continue running its printing presses 24/7, as it has been, for so long before the dollar takes a serious nosedive. The dollar has only been saved during the last several months because of the threatened default by Greece on its debt; but that attention diverter will only last so long before the world markets wake up to the fact that America has an even greater problem.
As Austrian economist Ludwig von Mises observed, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” The chickens will come home to roost, and maybe sooner than many people think.
Already, producer prices are popping as a flood of newly minted money enters the economy. Financial Advisor Bob Chapman reported as of April 24th that, “The Bureau of Labor Statistics (BLS) today released their Producer Price Index (PPI) report for March 2010 and the latest numbers are shocking. Food prices for the month rose by 2.4%, its sixth consecutive monthly increase and the largest jump in over 26 years. NIA [National Inflation Association] believes that a major breakout in food inflation could be imminent, similar to what is currently being experienced in India. Some of the startling food price increases on a year-over-year basis include fresh and dry vegetables up 56.1%, fresh fruits and melons up 28.8%, eggs for fresh use up 33.6%, pork up 19.1%, beef and veal up 10.7%, and dairy products up 9.7%. On October 30, 2009, NIA predicted that inflation would appear next in food and agriculture, but we never anticipated that it would spiral so far out of control this quickly. The PPI foreshadows price increases that will later occur in the retail sector.”
Trying to Flee
Largely because of these problems, perceived or real, Americans are fleeing the United States in increasing numbers—and taking their money with them. U.S. News & World Report has written that seven polls conducted between 2005 and 2007 show at least three million U.S. citizens a year are moving abroad (see www.usnews.com/news/articles/2008/07/28/a-growing-trend-of-leaving-america.html). And these are not just people in or approaching retirement; most relocating households consist of very-productive adults 25 to 34 years old.
Although politicians can be incredibly obtuse when it comes to solving our political and economic problems, they can also be stunningly astute at protecting their cushy jobs and pensions. They can see the emigration of many of the best and the brightest. But, to them, the most disturbing part of this outflow is not the loss of people; it’s those individuals’ annoying habit of taking their money with them!
The Politicians’ Solution
In today’s world of “government can do anything it wants so long as a vote was held,” Congress never even blinked an eye when it passed its most recent stimulus act on March 18th. Styled as the “Hiring Incentives to Restore Employment Act” (H.R. 2487), HIRE was hailed by some as a necessary package of $17.5 billion in tax cuts, business credits and subsidies for state and local construction bonds. Others denounced it as a boondoggle that would only waste money. A few, however, looked deep into the fine print of this law and saw the future.
For hidden there—probably unread except by its authors until after its passage into law—lay a small, but important, provision known as Offset Provisions—Subtitle A—Foreign Account Tax Compliance. This provision is a real eye-opener and portends future, more-restrictive steps as economic events unfold.
For the moment, though, this new law commands foreign banks to: (1) withhold 30% of all outgoing capital flows from the United States into that bank’s account, with the probable purpose of forwarding it on to the U.S. government; and (2) disclose all details of any bank’s account holders to the U.S. government, unless those account holders are exempt (i.e., hold no more than $50,000 in a foreign account). If any of these provisions are illegal under the national law of the foreign bank, such as would be the case in Switzerland and Luxembourg, then that foreign bank is required to close the account. How this would all be enforced if the foreign bank has no business contacts in the United States is unclear, but the law now exists nonetheless. Capital controls are now in place, and most certainly will tighten even further in the future.
In personal terms, look at it this way: in 2010, Jack and Jill decide to leave the United States for a cheaper, fuller life in Panama or Ecuador. So, they sell or give away their local goods, round up their cash by closing out American financial accounts, and wire the money on to their newly established home in Central or South America. If that money transfer is more than $50,000, then Jack and Jill must pay a tax of 30% upon after-tax dollars that they simply want to take with them to start a new life elsewhere! Remember, this is money they have already paid taxes on. And if they do not fill out the proper forms with the proper disclosures, the penalties are even higher.
They will also have no privacy (not that any financial privacy exists today anyway), since the reporting requirements on foreign bank accounts are extensive. For a thorough look at the privacy-invasive and other aspects of this HIRE provision, see the Orrick law firm’s fine analysis at www.orrick.com/fileupload/2537.pdf.
Of course, special exceptions have been written into this Capital Controls law for Central Banks and those whom the Secretary of the Treasury deems to be “of low risk for tax evasion.” The latter exception is rich irony indeed since the current Secretary of the Treasury, Tim Geithner, is himself suspected of tax evasion, having admitted to not having paid his income taxes for the years 2003 and 2004, and having underpaid them in 2001 and 2002.
Bar the Doors, Block the Exits
With the wars in Afghanistan and Iraq, hundreds of military bases overseas, foreign aid to 100 different countries, let alone huge existing domestic payments and obligations along with new ones being created almost every month, the burn rate for the Federal government’s financial reserves is prodigious. As this drunken sailor on a spending binge staggers forward, look for it to continue to paw at every purse within reach. Blocking the exits—one of our means of escape—is just one scary way for this foul sailor to continue taking our money and feeding its addiction.
Land of the free? Not when you are no longer free to leave and take your honestly earned life’s savings with you. WF
Published in WholeFoods Magazine, June 2010