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Tougher capital controls in China

Posted by John Reed on

A headline on today’s Wall Street Journal says “Beijing’s Rules Aim to Keep Cash Home.” Google the title to read the article.

I have been warning readers about that in the US for five years. Those rules are called “capital controls.” They basically prohibit possession or use of any foreign currency and, in the US from 1933 to the 1970s, gold bullion. They also prohibit taking the local currency out of the country (where it could be traded for another currency at the free market conversion rate).

What would the government care? When the government “prints” too much money it loses value. But that defeats the government’s purpose of “printing” too much money.

Gresham’s Law says when there are more than one currency, or when a single currency has more than one value—the official value and the free market value—everyone will demand and hoard the higher valued currency and seek to pay for everything with the lower valued currency.

The Chinese and U.S. governments want to pay their bills and debts with lower-valued currency. That means they have to force their citizens to accept the lower valued currency and one way to do that is to ban alternatives or to ban free market conversions of the local currency to other currencies.

The U.S. is in the early stages of this. It manifests itself in laws like FATCA and IRS Form 8938 and FinCen Form 114 and the federal government suing S&P for downgrading the U.S. government’s bond rating and in many federal regulations that force or encourage banks and such to buy and hold U.S. government bonds.

The process is far more advanced in places like Argentina, Venezuela, and China. Chinese businessmen leave the country with Chinese yuan sewn into the linings of their close to hide their violations of the capital controls forbidding taking more than $50,000 a year of yuan out of the country.

The Journal article begins with the words, “China is imposing fresh controls to prevent too much money from leaving its shores…” Restrictions on large foreign exchange transactions by corporations.

I have been appalled in recent years by Americans who express admiration for Communist China and do things like invest there and take their small children there to learn Mandarin. This is a country run by murderous dictators whose understanding of and tolerance of free markets is close to zero.

Their claim to fame in recent years—high growth—stemmed entirely from their extremely low base and a small amount of allowing free markets to happen—temporarily it now seems. The Communist Party of China has only one goal: staying in power. When economic growth appears that it might interfere with staying in power, they will throw economic growth and anyone including their own people under the rickshaw.

Don’t look at their GDP figure. Look at their per capita GDP figure. It’s 88th in the world according to the CIA. In terms of air and water pollution, they may be number one. Their own people are taking themselves and their money to places like Canada, the US, Australia, New Zealand, and so on. That ought to tell you something.

As explained in my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition, the way to defeat capital controls is to get the money out of the U.S. before they are imposed. I have done that by opening banks savings accounts in Canada, Australia, and New Zealand and by putting Swiss, Swedish, and Danish cash in a safe deposit box outside of the U.S. It is hard for an American to obtain a savings account in the latter three countries, plus they change negative interest rates in some countries and those three countries have lately had deflation or little inflation so it’s better to hold them in cash than in a savings account.

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