Countries that may protect against U.S. dollar inflation

Copyright 2011 by John T. Reed

When I wrote How to Protect Your Life Savings From Hyperinflation & Depression in 2009 and 2010, I looked in vain for other countries whose currencies you could put your money in as a safe haven from hyperinflation in the U.S. dollar.

I am now ready to recommend some countries for that purpose. Why did I change my mind? The world has continued to change in the last year to 18 months. Plus, I have learned additional information about other countries.

Character and capacity

Whom can you trust? Bankers speak of character and capacity. Character is your willingness to pay your debts. Capacity is your ability to do so.

As I said in my hyperinflation book, if you look at the financial crises histories of all the world’s major nations, which is best done in the book This Time Is Different by Reinhart and Rogoff, it is hard to find a country with a clean record.

For example, I now like Canada and Australia. But even they had some financial failures.

According to Reinhart and Rogoff, Canada had bank failures in 1837, 1866, 1873, 1908, 1923, and 1983-5; Australia, in 1893 and 1989-1992. Although there were no bank failures in Canada during the Great Depression, compared to 9,000 in the U.S. Big difference.

However, these events did not affect the purchasing power of their currencies (both called dollars and both, coincidentally, now near par exchange rates).

Also, these Reinhart histories include a number of events so ancient they are irrelevant.

National character

Transparency International does annual surveys to find out what countries have the most integrity and the least corruption—the whole country, not just the government. Here is a world map that shows how Transparency International rates them.

As you can see, it says the most honest countries in the world in 2010 are Sweden, Denmark, Finland, and New Zealand. Finland, it should be noted, was the only country that repaid the money we lent it during World War I. All the other European countries stiffed us. Other than Finland, those countries use their own traditional currencies. Finland adopted the euro.

TI’s second tier of honest countries is Canada, Australia, Switzerland, Netherlands, and Norway. That tier also includes Iceland and Ireland. One of those is a PIIGS (Portugal, Ireland, Italy, Greece, Spain) nation; the other is a financial disaster. TI is saying the people of those countries are not corrupt and will pay their bills if they can. But with regard to ability to pay their debts, I think Iceland and Ireland are not to be recommended at present. That renders their willingness to do the right things irrelevant.

It should also be noted that none of these second-tier countries except Ireland uses the euro as its currency. I would not recommend euros. That is only a 13-year-old currency and does not look likely to celebrate its 14th birthday. I already bad-mouthed the euro in my 2010 Hyperinflation book.

German marks would normally be a great currency to hedge against dollar inflation in, but in a fit of temporary insanity, Germany got rid of the mark and went to the euro instead. They are now like a champion swimmer with an anvil tied around their neck. The anvil is the PIIGS nations—who are probably going to destroy the euro soon.

The third tier in TI’s corruption/integrity ratings are the currencies that are scary today: U.S., U.K, Japan, and the euro zone.

National debt-to-GDP ratios

Perhaps the best ability-to-pay measure is national debt-to-GDP ratio. IMF and the Euro Zone require 60% or lower, or so they say. The Euro Zone is not very good at enforcing its rules.

Here are the debt-to-GDP ratios of selected developed countries ranked from the worst at the top (source: 2010 IMF):

Japan 220%
Greece 143%
Italy 119%
Ireland 95%
U.S. 94%
Iceland 92%
Germany 84%
Canada 84%
France 82%
U.K. 76%
Netherlands 64%
Spain 60%
Norway 55%
Switzerland 55%
Finland 48%
Denmark 44%
Sweden 40%
New Zealand 32%
Australia 21%

Note, a lot of the countries on the best end of the complete list with every country in the world, not this list, are there because they defaulted on their debts in the recent past and no one will lend them money anymore, so they have a great 0% debt-to-GDP ratio. In my article saying defaulting on the national debt, which we will inevitably do if we cannot inflate it away, is not as unthinkable you may figure, I noted that two of the benefits of default would be we have no interest or principal payments to make and our Congress and president would not be able to borrow any money—none.

Here are 17 top integrity countries ranked by Transparency International along with their debt-to-GDP ratios:

The countries in bold italics have a high integrity rating and a below-60% debt-to GDP ratio.

Small is not beautiful

But size matters. You generally do not want to own a security with a tiny market because it is not liquid enough. Too few people want to own it. If you were to move to the country in question, that nation’s currency would be liquid enough there to live on. But I doubt it would be easy to spend, say, Chilean pesos, in a hyperinflation-racked U.S.

Only one country in this list has a combination of a top TI score, a below-60% debt-to-GDP ratio and a GDP over $1T: Australia.

Canada has a slightly better TI score and a one-third larger GDP albeit with a worrisome debt-to-GDP ratio. One big thing I like about Canada is I can walk there if things get bad in the U.S. The other countries are far away and one of the things governments often do in currency crises is prohibit taking money or even yourself out of the country—because a whole lot of people would leave if they could.

Xenophobia

I worry about xenophobia, too. Americans are not the most popular people in the world, but I would say we are adequately popular in nations populated originally by people from England, namely England, New Zealand, Australia, Canada, Ireland. The Finns seem congenitally decent including toward Americans. The Netherlands has been a friend of America going back to the Revolutionary War and seems international in personality and orientation as opposed to xenophobic. Asians who live in their original country like Japan seem to me to regard Americans and a lot of others as gaijin, a word meaning foreigner but having nastier connotations. In a push-come-to-shove financial crisis, I have trouble imagining Japanese people in Japan suffering in order to pay debts to Americans.

The German-speaking countries—Germany, Austria, and Switzerland—behaved very badly in the 20th century, Switzerland’s part of that being stealing the accounts of the Jews killed in the Holocaust. I know they belatedly admitted that and paid some of it back a couple of decades ago, but they did it. Also, when San Francisco had its famous earthquake and fire in 1906, many San Franciscans were German immigrants who insured their American homes with German insurance companies. A number of those companies reneged on the insurance, solely on the basis of the fact that it would be hard for the policy holders in America to successfully sue them. Other foreign companies paid up. Was it over 100 years ago? Yep. But World Wars I and II were not. Germany has a long way to go to be trusted by the world again.

In Chile, we are gringos.

I am creeped out by the European nations who were neutral during World War II, namely Switzerland, Sweden, and Ireland. When the English-speaking nations have a war, they almost always rise up and help one another, with the exception of Ireland. Ireland has some sort of Hatfield-McCoy feud with U.K. When Hitler was on the verge of taking over all of Europe, the Swiss, Swedish, and Irish were willing to stand by with their arms folded and let it happen. So what does that say about them owing you money and the world being in a financial crisis?

So I think the currencies of Australia and Canada probably provide worthwhile peace of mind if you are concerned about the purchasing power of the U.S. dollar falling precipitously. On the other hand, there are some correlations between those two countries and the U.S. dollar. Correlations negate the effect of diversification, or more precisely, mean you have not really diversified because although the new asset has a different name and different other characteristics, its price still moves in the same direction as the asset you are trying to get away from at the same time. Those correlations are from international trade and connectedness between banks in the three countries.

Also, both Canada and Australia are heavily commodity-based economies. That’s great when commodity prices are high. And commodities are hard assets that are, themselves, great hedges against inflation. But sometimes, as in depressions, they are not.

My wife and I have transferred some of our savings to Canadian dollar accounts. I am investigating Australian and New Zealand dollar accounts as well.

I have been to Canada and Australia and U.K. I felt comfortable and welcome there.

I have also been to Germany, Hong Kong, France, Mexico, Vietnam, Italy, and so on. I did not feel comfortable or welcome in those places.

No easy analysis

There is no sure thing in any of this. But if you read the book When Money Dies, it is searingly apparent that the Germans, Austrians, and Hungarians in the early 1920s would have given their right arms for some foreign currency. Police would sometimes make locals eating in restaurants open their purses or pockets and confiscate any foreign currency.

We are heading for probably the biggest financial blow-up in U.S. history. Because so many things have changed since previous big crises during the Depression and early 1920s Germany, it is hard to pinpoint exactly what will happen. This week, a number of experts said we are only about five years behind the euro zone. I don’t know how they can be so precise. We might be five minutes behind Europe if investors figure if it can happen in Europe, it will happen here and soon.

You are on your own. There are no grown-ups in DC or on Wall Street who are looking out for you. And there is a lot more to it than just putting some money in other currencies.

Be careful out there,

John T. Reed

Here is a responding email from an Australian:

FW: Your article on Australian and Canadian currencies...
Hi John--

A reader from Australia here. We've chatted by e-mail before. Changed jobs since then.

Just some (I hope) complementary thoughts on your article on Australian currency:

(1) The Australian economy, as you say, is heavily based on commodities. In particular our biggest trading partner is China, which seems to import more iron ore than is really healthy. This is particularly so where, given the small amounts of economic news that come out of China, the place is sounding more and more like a very big Ponzi scheme conducted at the government level.

In my view because of that, it makes our economy pretty vulnerable to an economic slowdown in China or affecting it. So if the (likely) scenario comes to pass of American hyperinflation and/or depression, either of which would probably kill American imports, then China takes a massive hit and consequently the knock-on effect goes straight to Australia's bank accounts. Consequently, whilst I don't know exactly how deep or hard the effects would go, Australia would get hit in an international financial crash too. I might note that, going by the Great Depression, Australia seems to get hit harder in depressions than other countries mostly because we're a resource-based economy. We have no manufacturing industries left to speak of. (Our three main economies seem to be resources, tourism, and education - albeit I'd class the last as more or less long tourism given most of the time the overseas students we take don't stay here). In the Great Depression it was wool that was driving Australia's economy, and when international trade collapsed, that, too, collapsed. Wikipedia's articles on the Great Depression suggest we took somewhat longer to get out of Depression conditions than most other economies did.

(2) The form of government and regulation has to be considered too. In American terms I would guess most US citizens would regard the nation as medium socialist from their point of view. We've had a public health care system since roughly the seventies, so it's been interesting to watch the protests against Obamacare et. al. from over here on the far side of the Pacific. The wage system is award-based, which is to say for given industries there are set minimums -- in other words, we have an extensive set of minimum wage laws in place. We also have pretty strong regulatory (APRA, the Australian Prudential Regulation Authority) bodies covering banks, which on one hand might have been a good thing since it's the regulator, and not the government, that's seen as having prevented the worst excesses of the GFC from infesting our shores. On the other hand, it's a fairly small banking community: four major players and a number of lower-tiered "second class" lenders, and not a lot of competition allowed from international banks. That would suggest oligopoly conditions to some extent.

There's only 7 states compared to the US's 50, and the legislative boundaries between Federal and State seem to be a lot more clearly defined than it seems with the US. (The Federal has been slowly engaging in "jurisdiction creep" over the years, but from the Australian point of view it's been relatively benign, and in some cases warranted -- for example the regulation of companies, which cross state lines and therefore seem a bit silly to have 7 different sets of laws for them).

I also gather from your articles that there's a considerable degree of delegated lawmaking authority to government officials under the US system? Not really a factor in Australia. You have government departments, but they're more hamstrung by their legislation than empowered by it. There's a fair amount of certainty on what the law and regulations are from year to year.

(3) The political leanings of the present government are also a factor. For reference, our two major political parties would probably come across as medium to heavy left from the US point of view; neither of them are anywhere near the libertarian end of the spectrum, and the "rightmost" one, the Liberal Party, would probably look to be somewhere about the US "centre", if I can put it that way. The reason we came through the GFC with flying colours, leaving aside APRA, was because the Liberal government from 1996-2007 had paid down much of the national debt. The government's financial records for the past 10 years or so are available here: www.aofm.gov.au. The shrinking debt is best demonstrated by the shrinking number of bonds issued dries up from 1996 through to 2006 or so. (The Labor government before 1996 also set up for success in this regard: it decoupled our Reserve Bank, the equivalent of the US Federal Reserve, from the government, which meant that the Reserve Bank sets interest rates - not the government. In addition, that Labor government also tried to move our employee/employer relations system from Soviet-style centralised planning to at least being able to make agreements for individual worksites. Also, lest anyone think I trust the Liberal Party any more than Labor, the Liberals also engaged in the "half Keynes" game in good times of paying down the national debt but not raising tax rates, which is what Keynesian economics would demand. Rather, they also handed out "middle class welfare" on the back of increased mining receipts).

However, it's mainly because of that "saving up", or at least having bonds available but unused, that allowed the Labor government, which was elected in late 2007 just ahead of the GFC crash, to run up a big FDR-style stimulus program to allegedly try and stave off the worst of the GFC's effects. Basically, the government issued bonds. Lots of them. The website I've mentioned demonstrates it pretty clearly. It's the issue of those bonds, together with some "nation building" (read: make-work) schemes that has run the debt-to-GDP ratio up to 20% or so. There are also a few upheavals in the system coming: a carbon tax, which will pass the Australian Parliament shortly, and potentially a mining tax (on basically the three biggest miners) which will also pull some money out of the mining industry.

I should also say that for the next couple of years we have a fairly precarious political situation in that it's a minority government. Minority government means this: at our last elections in 2010, neither the Liberal Party or Labor got enough seats in Parliament to govern in their own right. Labor only formed government by forming a coalition with the Green party -- which is just as hard left and red-in-disguise as you could imagine -- and three or four independents who had no party at all. It is this combination that has pushed through a carbon tax, and while Labor does seem to be keeping the worst of the Greens' excesses down, they do wield an enormous amount of clout at least until the next Federal election in 2014. Labor's only got power by a thin margin -- 2 seats or so -- but it's still enough that they have to negotiate with the individual egos of the independents and in particular they have to deal with the Greens. And Labor, at least at the moment, is on the nose with the electorate; based on current polls if an election were held tomorrow they'd be wiped out with such a loss it'd take a good 8-12 years to recover. But those are polls, and the next election is still 2 years away -- a long, long time in politics.

Having said all that, given the relative inertia of the Australian system I think it would take quite a few years even with our present government to run up a debt-to-GDP ratio on the scale that the US has. That, of course, could all change depending on the US's financial position and how the government responds to it. And on the history, particularly with the Great Depression, there were measures proposed that match pretty closely to the gamut of government reactions you described in your book on Hyperinflation and Depression.

(4) One other point for the gold bugs in your audience: in your book, you draw attention to FDR's Executive Order 6107 that allowed him to seize pretty well all privately-held gold in the US. Let me be absolutely clear about this: there is an equivalent law permitting the same thing in Australia.

Section 50 of the Banking Act 1960 (you can find it, along with all other Australian Federal legislation at this site: www.comlaw.gov.au ) sets out quite clearly that if the Governor-General (sort of equivalent to your President, except with no real legislative power -- he's the figurehead, the English Queen's representative in Australia) deems it appropriate "for the protection of the currency", it is within his power to order the seizure of gold in Australia. That would include the power to seize privately-held gold as well.

The significance of that law is this: by Parliamentary tradition, the Governor-General exercises no independent authority. He (she at the moment) always acts on the advice (i.e. the instructions) of the Prime Minister. And section 50 also has no provision for this decision to be ratified by Parliament at all. That is, it literally would take one phone call from the Prime Minister to bring section 50 into play and thus for gold to be seized by the Federal government. Now, people have asked various finance ministers about this provision, and all that anyone's ever got out of them is that section 50 "is presently suspended".

This is a load of crap. To my understanding (but hey, what do I know, I've only been a lawyer for roughly 12 years in Australia) you can't "suspend" a piece of legislation. Either you repeal it, in which case it no longer operates at all, or you just choose not to use it. And even if it is "suspended", I doubt it would take too much trouble to "unsuspend" it, either.

My point is: if you buy up gold in Australia trying to hedge against a massive market crash of the kind John's predicting, beware. We have an FDR-style provision on the books and a government comprised of politicians, which is to say, untrustworthy bastards.

Hope this might be of some clarification and assistance. Otherwise, great article. Very proud for Australia to be included on your "look at" list.

Kind regards,

Michael Aulfrey