Will the G-7 Nations Impose Capital Controls?
Finance leaders from the Group of Seven, industrialized nations discussed collective action "to calm markets, if price moves become irrational." Finance ministers and central bankers from the G7 -- the United States, Canada, Japan, Britain, France, Germany, and Italy -- said that financial market turmoil was serious and persisting. They also said more work was needed to restore markets to good working order and safeguard global growth. The European Central Bank believes that turbulence on financial markets could continue for months.
Consequently the €-group have agreed that if there are "irrational" price movements in the markets, "we will collectively take suitable measures to calm the financial markets". The markets will not be forewarned of such action, "otherwise it will lose its effect if it is explained."
No action has been seen yet so no-one is too perturbed it seems. But we are, very perturbed! Could there be a more dramatic warning from the richest nations of the world for us? It may seem easy to assume that all they are going to do is to manipulate the froth out of the market. But they did not say that. How can one "calm" markets? And why will such action "lose its effect if it is explained?" Such statements are so strong they need to weighed carefully.
The succinct admission that turbulent markets will continue being turbulent for some time to come, while stating the obvious, is a warning from the entire body of major financial nations Finance Ministers [not warning from mere newsletter writers]. They are clearly concerned about the veritable Tsunami of Capital that is ready to rush from weak markets to strong, or the disappearence of such that is happening in the credit markets [like the pullback of the sea before the wave hits] and is being replaced by freshly issued money from the Central Banks. They are fully aware that volatility is here, as a market feature, to stay. They realize that such swings destroy the stability of world markets and make the markets malfunction, badly. The situation certainly has to be dire for them to issue such a warning?
What tools are in their hands to "collectively take suitable measures to calm the financial markets"? They are several and of different dimensions. We look at those that would be the first assumed points of action:
Exchange Rate or Interest Rate Management: It is unlikely they are referring to exchange rate or interest rate management as these tools are already in use by separate national Central Banks; however, if these nations want to manage exchange rates 'in concert' the game changes somewhat. We presently believe that the G-7 have agreed trading bands within which currencies will move. Outside those bands we expect the G-7 to act to 'smooth' them out. They would only contemplate such action if they exepected the volumes of capital are so large that they will make currencies move "irrationally". History has shown that Central Banks - no matter how important in the global money system -- can be defeated by speculators. The potential flows of capital that could flow at the moment are far larger than any speculator has imagined before.
If they succeed in holding exchange rates within specified trading bands, then it will be like making a four-laned highway for the capital to travel down. The markets from which they come from and those they go to will bear the full brunt of the tsunami and will show "irrational moves". Bear in mind it will be the movement of capital that will show any irrationality, not normal international trade. Consequnetly such moves must be prevented from destabilizing international trade and the exchange rates that affect them. The separation of capital flows from trade flows has usually been the first point of action by Central Banks often making a separate currency for capital movements. This can be through Capital Controls or Exchange Controls, subject to the severity of the "irrationality" of the markets affected.
Credit Markets: We have seen action from several Central Banks now -- in particular, the Federal Reserve and the European Central Bank -- to the tune of hundreds of billions of $ and €s (a figure expected to rise to over $450 billion). By the end of March we should know what this figure is headed towards in the next year as well as the last one. We have no doubt they will continue to act to save the banking systems of the G-7 group of nations through the replacement of lost values [capital] by the issue of much more as we have seen to date. We are led to believe that the subsidence of confidence in the banking system and amongst bankers themselves is spreading up from the poor end of the housing market to the more expensive end of the market. Thereafter, it is hitting the bond insurance market, likely to hit the credit card market and could push over into the car finance market. Thereafter, who knows where? There is no reason why this disease should stop at one point and not the next. The entire system is like an inverted pyramid with the world banks being the tiny point at the bottom. They will have to focus their attention the most on the capital side of the global banking system! The role of the Central Bankers as lenders of last resort has been amply demonstrated over the last few months and will continue to be so. Unfortunately, the money issued has not been taken by those who really need it, but has often been taken by banks funding other aspects of their operations leaving the crisis relatively intact. The sheer volume of newly issued capital adds to the mighty volumes of capital that can move and cause "irrational movements" in markets.
The G-7 nations are giving us warnings of their coordinated action. Therefore, it has to be action to 'calm' international movements of capital. As has been the case in the past and will be in the future, such action will attempt to leave international trade untouched and unhindered to go its merry way of keeping the system going amongst a regime of stable [relatively] exchange rates. Hence, the chief tool has to be Capital Controls or exchange Controls. These measures will be far more than punitive simple "Witholding Taxes" that penalized the export of capital seen in the States in the past. They will have to be immediate and effectively halt "irrational movements". Only Capital and Exchange Controls fit the bill.
In the Gold Forecaster we have highlighted the probabilty of Capital Controls and Exchange Controls for some time now, but this warning tells us that they are imminent and will arrive without warning as the G-7 have said themselves.
What does this mean for you and for me and for all those financial institutions out there across the globe? It means if we want to protect ourselves from the pernicious effects of these we must act NOW! The time for adjusting one's affairs, not only to protect one's wealth, but to re-structure it beyond the reach of these authorities is running out. It would be extremely unwise to wait until the authorities have acted because you might find yourself listening to the sound of the trap of Controls snapping shut over you?
Storing bullion in Switzerland [as the Bullion Vault does for its clients] is a way to go and we would happily recommend working with them as we will do, as it is out of the reach of the G-7. The only drawback to that is that it remains in the name of the owners, who will be resident most likely inside the nations of the G-7. As such they are faced with a dilemma when they declare to their authorities that they own gold in foreign lands. It is no small step for those authorities to tell them to bring the gold home? That is where we can help too.
This article is not the forum to discuss ways and means of protecting oneself from such controls, but after 25 years of practical experience in successfully structuring people from such controls in a manner satisfactory to the monetary authorities of three lands, we know of successful ways to protect one's wealth and would be happy to assist any searching for such protection.
As a final thought, when such controls are imposed they produce remarkable opportunities to increase and create wealth, so not only benefitting one, but adding to one's wealth.
For subscribers who wish to know more on these subjects and who would like to understand more about Capital and Exchange Controls, please contact us for more information and articles on this subject.