Copyright 2012 by John T. Reed
I did not wake up until 11 AM this morning. Why? Apparently because I put myself through the ringer yesterday.
From SEP to Swiss francs
Practicing what I preach, I went to Vancouver, Canada to invest in Swiss francs. The money was previously in a U.S. dollar money market deposit account in a U.S. bank—in a SEP account. That is a sort of IRA. To move it to Swiss francs, I had to withdraw it from the SEP and pay tax on the withdrawal. But I would have had to pay taxes on it if I withdrew it for any other purpose, too. My concern was far less about taxes and the bankruptcy protection pension accounts give than about my concern that the U.S. dollar will hyperinflate.
I got an email today from a reader. He had been trying to find a Swiss banker among his friends who would agree to give me a savings account there. He was unable to do so. He was not the first to try to help me and send that response.
Taken care of
No matter. I am now invested in Swiss francs. It is by my analysis one of the top four currencies in the world for U.S. dollar (USD) hyperinflation protection. All currencies have a three-letter trading symbol. the U.S. dollar is USD; the Swiss franc, CHF. Don’t ask me what the CH stands for.
Do I have a Swiss bank account? No. I could not get one.
I regret the inability to access my CHF at any time from anywhere in the world—which, in 2012—is a standard feature of a 21st century bank account.
But I do not regret anything else about it. First, Groucho Marx said he would not want to be a member of any club that would consent to his being a member. I have the opposite feeling about Swiss banks. If they do not want my account, I do not want their bank.
It’s not personal. They did not reject me as an individual. They rejected my citizenship/residence in the U.S.
That is because the U.S. has cracked down on them and threatened them in the future. In part, Swiss banks are at fault. For decades, they have sought the business of the world’s criminals, tax cheats, and dictators. The U.S. rightly attacked that business model. The unhappiness of Swiss bankers about that is wrong. But the U.S. government is wrong to try to force Swiss banks to become unpaid IRS harassers of U.S. taxpayers who dare to put money in foreign bank accounts. As is so often the case with government in general and the Obama administration in particular, it tries to do by executive branch regulations and rules what it cannot get through Congress. That is unconstitutional, and the U.S. courts may say so—years from now.
But the fact is you do not need Swiss banks and Swiss bank accounts to use the CHF to protect you from U.S. hyperinflation. You can just buy the damned currency.
Swiss francs, si.
Swiss banks, no.
Deposit box pays no interest—just like gold
Most Americans regard putting cash in a mattress, or a safe deposit box, as stupid because it pays no interest. Like gold?
Don’t put it in a mattress, because it is at risk of loss in fire or burglary. Put it in a safe deposit box.
Outside the U.S.
The safe deposit box needs to be outside of the U.S. Why? Because when we get USD hyperinflation, the government will like pass capital control laws which make it illegal to own gold (Executive Order 6102) or foreign currency. You can see the actual notice of the executive order at http://en.wikipedia.org/wiki/File:Executive_Order_6102.jpg. Very chilling to look at.
Typically those laws would order you to sell your foreign currency promptly to a nearby federally chartered or regulated bank for less than its current market value. In other words, if you are smart enough to invest in foreign currency, but dumb enough to do so in the U.S., your smartness will be nullified by the combination of your dumbness and new capital control laws.
The U.S. government, contrary to myth (discussed in the above-linked Executive Order 56102 article), will probably not order you to open your safe deposit box for them to see what is in it. And, unlike “foreign financial accounts,” you do not have to report ownership of foreign currency to the federal government.
However, what good will the foreign currency do you if it is safely in your safe deposit box in the U.S. and possessing or using it is illegal? What’re you going to do? Go there once a week and run your fingers through it then lock it up again? The moment you take it out and try to use it you are breaking the capital control laws and that typically entitles the government to confiscate your foreign currency. If however, you have foreign currency in a safe deposit box outside the U.S., you can go there, take it out and spend it in the country of its origin.
Keep costs of visiting the box as low as possible
Which foreign country should such a safe deposit box be in? One that is close by like Canada or the Bahamas so the cost of physically going there is minimized. Mexico is also close but it is a joke as far as being a place where you would store valuables. Or do anything else. Demasiado corruption and violence. Pequeno rule of law.
Or, if you have occasion to regularly go to some other country that is farther away, you could use a safe deposit box there without incurring an incremental travel costs.
Aside from the fact that you can’t get one, there are two other reasons to avoid Swiss bank accounts at present.:
1. They now “pay” negative interest on savings accounts. That is, they deduct, rather than add, interest to your account. I kid you not. The Swiss are pissed off that their currency is now in such high demand that it is hurting their exports and ability to attract tourists. So they are beating would-be depositors away with sticks. But you can buy Swiss francs and put them in a safe deposit box somewhere—even in Switzerland, but they probably wont let you have a safe deposit box if you do not have an account and you can’t get a account. By buying the actual currency and just holding it in a safe place, you avoid paying negative interest on it.
Currency in box goes up in purchasing power during deflation
2. Arguably, I am double counting here because interest rates reflect inflation and deflation rates. But it’s not a 100% lock-step connection so I will cover this as a second advantage. During deflation, you actually get a positive real return on currency in a safe deposit box in spite of getting no interest on it. How? During deflation, the purchasing power of the currency in question goes up. That is the definition of deflation. If you put any currency in a safe deposit box for a year, and that currency experiences deflation during the year, when you take it out a year later, you will be able to buy more stuff with it than you could when you put it in—same as if you earned a positive real (after adjustment for inflation) rate of interest during inflation (which is hard to do).
So has the Swiss franc been deflating lately?
Yep. Check out this graph of Swiss franc inflation/deflation. Set the date selection to January 2009 to today. You will see that the Swiss franc had deflation in 2009, 2011, and 2012. It also had a little inflation in 2010 and 2011. Not enough to worry about especially when you subtract U.S. inflation from the interest rates you have been earning on your savings accounts here. The key number is after-tax rate of increase in purchasing power or real interest rate.
Positive real after-tax rate of return while in box
I expect you will find that Swiss francs in a safe deposit box have recently earned a higher after-tax increase in purchasing power than U.S. dollars in your savings account. I am assuming here that you spend the Swiss francs as such—easiest to do on a vacation to Switzerland—and that such use of the francs is not a taxable event and results in no gain. I also expect you will find that the real interest rate you earn on Swiss francs in a safe deposit box is higher tan the real interest rate you earned in a U.S. savings account. Real interest rate equals nominal interest rate—the one the bank says you are getting—minus the inflation rate of that currency that year. In the U.S. savings account, that would something like nominal interest rate of .5% minus inflation rate of 2% = -1.5% real return. Versus Swiss francs in a safe deposit box with a nominal interest rate of 0% minus inflation of -1% (from the above linked graph) = plus one percent real return. Deflation is inflation with a minus sign in front of it. Minus a minus is a plus if you recall elementary school math.
In other words, after you take out the inflation or deflation, Swiss francs in a safe deposit box literally earn a higher rate of return than U.S. dollars in a U.S. savings account.
Deflation causes the purchasing power of the currency in a box to go up. Deflation causes the currency value of gold in a box to go down. Over time, during deflation, you would need more gold to buy the same amount of that currency.
Inflation causes the purchasing power of the currency in a box to go down. Inflation causes the currency value of gold in a box to go up. Over time, you would need less gold to buy the same amount of that currency.
Read it again if you are having trouble understanding. It’s true.
So if Swiss francs start to inflate significantly, I would spend my Swiss francs, maybe on a vacation to Switzerland, maybe on buying not-inflating currencies like Canadian dollars. But as long as Swiss francs deflate or do not change value, I’m golden, if you’ll pardon the expression.
Actually, the people who do have Swiss bank accounts ought to consider moving their money to safe deposit boxes in Switzerland or elsewhere. End the negative interest and risk of bank failure.
Very liquid market
People in the forex (foreign exchange) business like the large size of the Swiss franc market. Investopedia says it is one of the most traded currencies in the world. That’s fine and better than being one of the least traded currencies in the world. But my criterion is sort of if the USD hyperinflates, can I go to Switzerland and live normally until the hyperinflation in the USD blows over.
I think the answer is yes, albeit in time increments consistent with Swiss tourist and temporary visa policies. If you have four or more currencies that are not hyperinflated, you should be able to be more or less a perpetual tourist in those countries until the hyperinflation in the US blows over.
On the other hand, Luxembourg has a better debt-to-GDP ratio than even Australia. Would I invest a bunch of money into Luxembourg currency? No. Too small of a country. I doubt I would be happy staying there for months during hard economic times in the U.S. Too few choices. I don’t know if even the Luxembourgers would be happy there during such a situation. They might have to import food and that might be prlematic during finanical difficulties. Countries like Australia, Canada, New Zealand, and Switzerland could have a varied healthy diet without imported food. But the question is moot because the Luxembourgish franc was replaced by the euro and an will have nothing to do with that cluster.
So I would rather own a widley traded currency than a thinly traded one, but tha is a secondary consideration after just going there and living in a normal way by spending that currency.
One measure of how widely traded a currency is is whether the curency’s futures price are listed in the Wall Street Journal. They are in the case of Australian and Canadian dollars, countries with GDPs larger than a trillion dollars; and Switzerland, whose GDP is about 700 billion dollars; but not New Zealand’s, which has a GDP of just $161 billion.
However, although I have never been to New Zealand, all I have heard indicates it is a great place and would still be nice enough when the U.S. dollar was hyperinflated.
Make no mistake, although there is no bad direct effect of hyperinflation of the USD in New Zealand, there is an indirect effect on the economies of the U.S. and the world. But there is a big difference between hyperinflation, which makes the U.S. dollar worthless, and a recession in New Zealand caused by the U.S. not buying so many NZ products or tourist services. My wife and I would be able to buy NZ tourist services with our NZ dollars.
So I do not worry so much about forex worldwide liquidity and market size, only whether I can temporarily acquire fresh food, heat, medicine, and so on while the U.S. is going through a period where those routine purchases may become impossible.
Many buying Swiss francs now
My Canadian banker said his foreign currency trader asked him, “Why are so many Americans suddenly doing what this customer of yours is doing? [buying Swiss franc cash]” Either they read my web articles or they are great minds operating in the same channels.
Trying to do too much in 12 hours
So why did I sleep to 11 AM the next day. When I went to Vancouver to open my Canadian bank accounts in October 2011, I spent the night there to make it a more leisurely, enjoyable trip, which it was. But I thought I could have done it as a day trip: fly up in the morning and fly back in the evening.
Yesterday, I tested that theory.
F’get about it.
My 8:33 AM departure required me to get up at 5AM. I was still groggy after my shower.
My wife, who commutes to San Francisco daily—albeit by commuter train—said there should be no traffic then.
Wrong, but thank you for playing. The Bay Bridge metering lights were on and I hit heavy traffic several times. Still managed to make it including a quick Burger King breakfast of french toast sticks and going through security, but there is a mental toll to traffic jams and uncertainty as to whether you are going to make it. (Don’t buy French currency—the euro—but their toast sticks and fries are okay.)
It was surprisingly hard to find a parking space in the SFO parking garage. I thought about taking BART, my wife’s commuter train, to SFO, but while that is okay in the early morning, you do not want to be doing that at 11:00 PM. For one thing, they shut it down at some point. Parking there cost me $36. Had I spent the night in Vancouver, I could have used BART and paid only a small parking fee or had my wife or son take me to our local BART station. So the hotel savings is offset by the higher parking cost. Also, under U.S. tax law, you can deduct meals on a business trip only if you go away from home overnight. So that would have made my supper, breakfast, and supper the next day deductible. The banker bought the lunch. Doing it all without staying over night made my meals nondeductible.
Pirates of the Caribbean cubed
Then there was the sight I saw when I entered the terminal: a human ant hill of Pirates of the Caribbean line corrals that were filled with thousands of people. What disaster! More mental stress from the noise, crowds, and uncertainty about how long it would take to get through. Would I miss my breakfast and have to survive of airline pretzels for another five hours? Or even miss my flight?
I discovered what should have been evident in the planning. In my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd Edition, I spoke of failures caused by long, complex tightly-coupled chains of necessary events. Tightly-coupled means the time between one required event and the next is so small that it is hard or impossible to adjust of one event does not go as planned. Nuclear power plant failures typically are caused by this error in structuring processes.
Our plane did not leave on time. A lav was broken. After trying to fix it, they changed to to a new gate and plane that was itself just arriving. We left at about 9:15 AM instead of 8:33 AM. More mental stress.
Canadian customs line longer
Upon arrival in Vancouver, I encounter another even worse human ant hill at the customs/immigration point. I had to stand in that line for 50 minutes. A guard explained that Canada had recently laid off 2,700 customs immigration people. Oh, well. That sort of fiscal prudence was why I was there.
Tried to call James Curran at Bank of Montreal to explain why I was late. My cell phone did not work in Canada. You also have to keep it tuned off when not using it to avoid grotesque roaming charges.
Canada Line (modern train) into the city was on time. Since it was my second time, I just walked up to the ticket machine, stuck in a couple of Canadian $5 bills, and got my ticket. The previous time, I had to ask for help and paid with a U.S. credit card thereby incurring a currency-conversion charge. I finally walked into the bank at about 1PM—a mere four hours from bank-closing time—and I had about five chores at several different locations I wanted to accomplish.
Let me skip to flying home that night before I discuss the banking stuff.
Flying back home the same day
I took the Canada Line back to YVR—but it was rush hour. Had to stand all the way to Bridgeport, the stop where you get off to switch to the YVR train. At that point in my day, I felt like I had been through the wringer and would have appreciated a seat. In retrospect, I guess I should have waited for a YVR train to begin with.
I had my rain coat because of the forecast, although it did not rain. In the train car, I buttoned it all up—a trench coach—for pickpocket protection. I am not aware of any particular pickpocket problem in Vancouver, but I know they exist everywhere and being pressed against other people in a train is prime time for pickpockets. My wife was a victim in a San Francisco bus once. I was not picked.
I treated myself to a nice supper at the Fairmount Hotel Vancouver Airport. Just as I used Canadian currency to buy my Canada line tickets, I also used Canadian currency to pay for my supper—my BMO debit card. That saved me paying the currency conversion charge I would have had to pay if I had used U.S. credit card.
My flight was 8:30 PM. Then I went to the ticket counter. It was deserted. There was one family and me. Then I went to security. No one there but me and the security guys. Tumbleweeds were blowing through the terminal. A Royal Canadian Army artillery unit was practicing shooting their cannons down the hail ways of the airport because the rounds would not hit anyone there. Okay, I made that artillery part up, but they could have been there doing that. The shops were almost all closed. The restaurants were almost all closed. The sidewalks inside the terminal, such as they were, had been rolled up. Ghost town. The airport was still open, but only barely.
Then I got to U.S. customs/immigration. That is in Canada instead of at SFO. Three agents were there, only one had anything to do, talking to that same family I had seen at the ticket counter. One of the other two motioned for me to see him. I got about ten questions from both the Canadian agent arriving and the U.S. agent leaving, but having been through it before and heard from the experiences of others, I had no trouble answering their questions. Each commented something about my being a frequent traveler to Vancouver. Not really. Three times in my life, once as a tourist in 2010. But my vicarious experience from readers and research on the Net apparently showed and they mistook me for a regular U.S.-Canada flyer.
United took me to Canada; Air Canada flew me home. Air Canada is much more civilized although they seemed to be serving tap water to everyone. I waved them off because of my big supper. Bought some Pringles and a Sprite on the way to Canada on United. United was the usual. Air Canada seemed a step up.
It threatened to rain until after noon in Vancouver when the sun peaked through until sundown. Temperatures were low 60s. When we left, we flew in dense clouds for the first few minutes. Then we popped out above them to a clear sky with a carpet of clouds below. San Francisco had unlimited visibility and temperatures in the 70s when we arrived 10:47 PM.
On-time departure and arrival at SFO, got in my car at 11PM and went home without incident.
Vancouver is a gleaming city in a beautiful setting of harbors and mountains—similar to San Francisco. But we love our adopted home of California where my wife and I have spent most of our lives and our sons have spent all of their non-college lives. I got to Canada, and Swiss francs, not because they better than America, but only because their monetary and fiscal policies are better than those of our current elected federal officials. It is a multi-flag strategy about which I will write more later. There is a best place for your rainy-day savings, and it sure as hell is not in the U.S. or U.S. dollars at present. There is a best place to live—depending on your family and what you like to do—and that is California for us. You should avail yourself of the best place for each aspect of your life than does not require your presence. You should live in the place in the world that is best for you based on the overall pertinent facts. Same applies to where you should be a citizen. These are not the times nor is the U.S. the place for blind inertia.
Travel in the evening
Lesson learned: There are days of the week and times of the day when the hassles of air travel are all but eliminated. Fly then. between supper and 11PM on a weekday seems to be one of them. I do not like flying when I am normally sleeping so I do not recommend red-eyes. If I had it to do over, I would have flown there Monday evening and returned home Tuesday evening. In other words, I would have been on the same plane returning home, but left at a totally different time and day to go to Canada.
Eliminate the need for bank personnel to move money
I changed the configuration of my Bank of Montreal accounts getting rid of the USD checking account and the GIC investment account. I don’t need the USD checking. I had it before because I made deposits using USD checks. Henceforth, I will make deposits by wiring Canadian dollars (CAD) from my U.S. bank. You just tell the wire department to convert your USD to CAD before the wire transfer. There is a currency conversion charge, but there was also one of those at BMO going from the USD account to the CAD checking.
I am replacing the GIC with a regular savings account because I can move money in and out of that account—on line and with checks and wires—without needing my banker to have authority to do such things. We are uncomfortable with anyone else having the authority to move our money around in our bank accounts.
While in Canada I also opened the same type of accounts in another Canadian bank. No big reason. Just a little diversification.
I got a safe deposit box at one bank. No big deal. If you have an account there, you can also rent a box.
Safe deposit box size
The box I initially requested was too small. I calculated the amount of space the currency would take up by Go ogling the currency in question. On line you learn the length and width of each denomination of each bank note (a $20 bill is a bank note, as is a 20CHF piece of currency). USD paper currency, unlike coins, are all the same size. But Swiss franc lengths and widths vary by denomination—so blind people can tell the denomination of the bank note in question. Swiss francs also have an embossed symbol like street signs of different shapes that enables the blind to recognize the denominations of each Swiss bank note.
Trickier is the thickness of currencies. When you buy significant amount of currency from any country, they usually arrive in 100-note bundles wrapped in a paper counting-machine tape that states the denomination and number of bank notes in the bundle—always 100 in my very limited experience. The Internet told me that a bundle of 100 bank notes is one-half-inch thick.
Yeah, if the bank notes in question are brand new, never-been-touched-by-human-hands, pristine, straight from the Bureau of Engraving or whatever it’s called in Switzerland. Used bank notes, which were part of what I got yesterday, are about double the thickness of brand-new bank notes. When I put the bundles next to the original small box, it was obvious that they would not fit. To paraphrase Police Chief “Martin Brody” in Jaws, “We’re gonna need a bigger box.” At one point, I put some Canadian currency in the small box and then went to lunch. After lunch, it became apparent that the small box was too small, but we could not get it out of the drawer because it only had a handle on one end and that end was on the wrong end. My safe deposit box in the U.S. has handles on both ends.
Anyway, while I was counting, a team of bankers figured out how to get the little box out of the slot. I had to be present by rule for that, but at the same time I had Swiss francs spread all over a table in one of those private rooms where you go with your box to make changes to its contents. So we had this comedy scene where I had to lean out of the counting room to look back into the vault while simultaneously guarding my Swiss money in the room.
Counting currency is slow work. I had not done it since I was a pay officer in the Army and had to carry around about $55,000 cash in a brief case to pay the guys in our company. I was accompanied by a private with a loaded M-14 rifle. His IQ seemed to be lower than the caliber of the rifle so he wasn’t much comfort. As pay officer I had to count and sign for the damned money then I had to count out each soldier’s and get him to sign for it and take those receipts back to the finance building. Once, I failed to get one soldier to sign the receipt—400 guys in one day. When I called him in, he jokingly asked, “What money?” “Not funny soldier”, I nervously told him. He laughed and signed the receipt.
If I had purchased all 100-franc notes, it would have taken far less time to count them and I could have rented the smallest safe deposit box. But I bought 80% 20-franc notes and 20% 50-franc notes; no 100s. When I bought my CHF, a 100-CHF note was worth about $107.
A reader went to Vancouver and followed my footstops. But unlike me, he did not tell the foreign currency seller what denominations he wanted in advance. As a consequence, he ended up having to buy what he wanted from two different currency sellers and he had to accept whatever denominations they could scrounge up to reach the total he wanted. So that took up more space in the box. He also had the currency sellers use their machines to count instead of him after he checked one batch of notes to see that the count was accurate.
$100 bills and 100-CHF notes are the denominations of criminals. See the current book The End of Money (which should really be titled The End of Cash because that is really what it is about.) U.S. soldiers found a warehouse in Iraq that was full of U.S. 100-dollar bills owned by Saddam Hussein. Nowadays, most cash has cocaine residue on it. I would guess that 100-dollar bills and 100-CHF notes have even more cocaine residue. Buying lost of cash makes you suspicious enough. I am not interested in attracting drug-sniffing dogs in addition.
100-dollar or 100-CHF notes are a show-off denomination—a way for the pinky ring, gold chains, “What happens in Vegas stays in Vegas” crowd to show off how rich they are, or to pretend they are rich.
$100 bills and 100CHF notes are a pain in the ass. All my life, I have seen signs in stores that they accept no denominations larger than $20 or $50. There is no drawer in U.S. cash registers for $50s, let alone $100s.
I have only had a $100 bill in my hand about three times in my life. In each case, they made me nervous about loss or theft or counterfeit. When I was bartender, one customer gave one to me and asked for change. He said I was the only bartender he would trust to give him change for a 100. Nice compliment, but you can see the nervousness about the denomination in his behavior and words.
The last time I touched a $100 was when I made a speech and one of my sons sold my book in the back of the room. He accepted a $100 bill for one.
I asked, “Do you know how to spot a counterfeit $100 bill?”
“Well, then don’t accept them.”
I took it to a bank and got five 20s for it.
100s are far more likely to be counterfeited.
Is my recommendation to buy CHF currency hard and fast?
For the moment, yes.
Is my recommendation on denominations hard and fast?
No. Do what you want. The main issue is the CHF itself, not the denominations. I just offer my example and reasons for what you think they’re worth.
Counting Swiss francs that belong to you is more fun than counting military payroll cash, but not much. Allow for enough time. Figure out how long it takes by counting some U.S. currency before you set up the transfer of a large amount of cash to you.
Some in the reading audience may wonder why I did not just use a reliable seller of foreign currency and trust their count. Wouldn’t it be gauche to count every bank note?
Call me gauche. Some might think the U.S. Army could be trusted. Maybe so. There was never a discrepancy. They used machines to count it as did the supplier in Canada. But we were told in the Army, and I would have done it whether they told me or not, to count every dollar of it. So I counted every single Swiss bank note yesterday.
I did use a reliable bank and they used a reliable seller of foreign currency. And I found no discrepancy. But I counted every bit of it. Trust but verify. If you’re filling your Scrooge McDuck money bin, get your wife or husband to help you count. Do it in phases. Bring in your own counting machine. But do not fail to count it. Novices may think counting is a sign of lack of sophistication. Bullshit! Not counting is a sign of lack of sophistication.
I had to be there physically to rent the safe deposit box and put stuff in it by definition. That would have been true if it were in the U.S. but my wife does not need to go to Canada in person to be added as a signatory on the box as she did to become joint owner of the bank accounts. She will just sign a form which I will mail back to the Canadian bank.
A number of my readers have told me they also opened accounts with James Curran in BMO. I asked James how many. “Quite a lot,” he said.
When I first started telling readers they ought to do this, the reaction was sort of,
Put my savings in a foreign country!? No way!
Then it became,
Well, how do you actually do that? I went on line at some Canadian banks and there was no way for an American to open an account.
So then I explained that I just got referrals from friends in Canada, Australia, and New Zealand and suggested readers do likewise.
Then I got a bunch of whining about how hard it was. For Chrissakes people! If it was easy, everyone would be doing it. Exert yourself a little.
I mentioned to James Curran, my BMO banker, that a lot of my readers were begging me to give out his name, bank, and contact info. He said, “Go ahead.” I asked him if he understood that could be a large number of people. He said it was okay.
I have since provided the bank names and contact person name and info on five banks in Australia, Canada, and New Zealand. That seems to have opened the flood gates. A couple of those banks were dug up by my readers not me.
So, lessons learned:
A. Readers want detailed direction. I had already learned that as a how-to writer in my real estate investment, coaching, self-publishing, and succeeding books. Indeed, my coaching books are extremely detailed, telling readers what to do every minute of every practice and during games. But in finance, there is a certain amount of privacy and discretion that makes it hard to give total detail in every case.
B. Persuading real Amurrikans to do anything outside the borders of the U.S., or that seems a rejection of the notion that the American way is always better, is hard. Get over it. When I was kid in the 1950s, America was number one by a wide margin in all categories. Since then, the liberal educated elite have come to the conclusion that the American way is always the worst and blame America first for all the world’s problems both real, like economic stagnation, and imagined, like global warming.
I am not about either of those. It is a fact that America has slipped well below number one in many many categories. It is a fact that our Constitution has some fatal flaws, mainly letting politicians decide how much to spend, borrow, and tax. They will spend without limit to buy votes. They cannot have that power. Such things need to be decided by binding national referendums and a grand jury Congress. There needs to be a constitutional amendment preventing any new federal borrowing other than refinancing existing bonds as they mature. Not a balanced-budget amendment. The politicians will play games with that like they do in California.
None of those things are going to happen. Hyperinflation is going to happen, probably within four years. If you do not takes steps to protect yourself, you and your family are going to lose much, if not most, of your life savings. In many cases, people will lose all of their life savings because they are all in “safe” investments like FDIC-insured bank accounts and U.S. government bonds.
You need to replace grade school and Lee Greenwood abstractions about freedom and exceptionalism with concrete reality that goes by names like Nancy Pelosi, Harry Reid, and Barack Obama. You need to do some concrete research into things like Transparency International corruption ratings which show Canada is a less corrupt country than America. New Zealand ranks less corrupt than Canada. Switzerland and Australia match Canada. All four are less corrupt than America. Is it so terrible to want to put your life savings in the least corrupt countries?
Look at the debt-to-GDP ratios of America and the various countries I recommend. That is the best indicator of likelihood of hyperinflating their currencies. There are two raters in that table: CIA and the IMF. You can get the table to rank the countries by debt-to-GDP ratios. In both cases, the first 20 or 30 countries are stupid places to whom you would never lend money like Afghanistan. They have low debt-to-GDP ratios because cannot get any debt not because they are responsible. But as you go down the list, you eventually hit the countries with good credit ratings like Australia. On the IMF ranking, America is 11th worst in the universe. Australia is 44th best, but all the countries above them, with the possible exception of Luxembourg, are countries where you would not put your savings, like Russia, North Korea, Nigeria.
All of my four recommended countries for your savings rank above the U.S. in the American Heritage Foundation economic freedom index. Lee Greenwood may figure the U.S. is free, but he needs to get out more. Maybe to Vancouver, Canada.
Here is an email I received on 6/28/12 from a Swiss reader and my response:
Dear Mr. Reed
I am a longtime reader of yours from Switzerland. I have some additional info and considerations regarding your article about buying Swiss francs:
-The CH in CHF stands for Confoederatio Helvetica, the official Latin name for Switzerland as the country has four official languages.
|-The Swiss Franc has been pegged to the Euro at 1.20 Francs per Euro by the Swiss National Bank last September. They really seem determined to print as much Francs as needed to keep the peg and currently have the political support of all major parties for that. So that means you are now basically buying a kind of Euro
The Swiss franc’s peg to the euro is voluntary. EU countries like Sweden and Denmark have treaty obligations to peg to the euro. Switzerland is not an EU member. Switzerland is voluntarily pegging to the euro because they are surrounded by euro countries and suffering as to exports and tourism as a result of their currency value rising in relation to the euro. A voluntary peg is no peg at all. A country defending its currency by making statements and buying or selling its own currency is a poker bluff. Britain tried that when they did not like the pound moving in a certain way. George Soros famously made his first fortune betting against the British government, and he won. The British government lost. Wikipedia says, “He is known as "The Man Who Broke the Bank of England" because of his US$1 billion in investment profits during the 1992 Black Wednesday UK currency crisis.” Governments whose currencies float with the market trying to control the market price is like their repealing the law of gravity.
Hey, if Switzerland is really serious about their peg, there is a simple way for them to convince me and the rest of the world and Switzerland knows what it is. Join the EU and the Euro zone and set your CHF to euro conversion rate at 1.2 francs per euro for the transition day.
What’s that you say, Switzerland? You’re not going to join the Euro Zone? That’s what I thought. So how about ceasing to insult our intelligence with your euro peg. The day I think you’re serious about your euro peg, I’m out of CHF. And I predict you will be off of your euro peg in a New York minute the minute you decide the peg is no longer in your interest.
Note to Switzerland: Soros is still around. Furthermore, he is a multibillionaire now. He had no billions when he broke the UK. He made his first billion from doing that.
Basically, Switzerland, like many countries before it, is trying to violate the Law of One Price. There is now a market price for CHF and an official fixed Swiss exchange rate of 1.2 euro = 1 CHF. That is two prices. That causes the world, mainly guys like Soros but even little guys like me and my readers, to buy at the lower price and sell, later when the attempt to violate the Law of One Price collapses. I and my readers are hedgers, not speculators like Soros, but it makes no diffference. Collectively we are more powerful than the Swiss central bank. When the U.S. tried to maintain a fixed-rate gold standard, the world market sucked monstrous quantities of gold out of the U.S. by turning in their dollars for it. The world will trade 1.2 euros for CHF in the same way. Switzerland can decide to print the CHF to meet that demand, but that will cause high inflation in the CHF. I am currently betting that the Swiss are too familiar with the horrors of hyperinflation from the 1920s, and too prone to use referendums to decide important policies, to let that happen. Americans have no way to restrain politicians from spending us into bankruptcy. Representative democracy does not work regarding fiscal and monetary responsibility. Referendums do.
|… and the Swiss will have to import all future inflation that will come out of the Eurozone mess. Of course, if the inflation gets high enough, people will probably want to get rid of the peg – but that moment seems to be a few years in the future.
My reason for diversifying out of the USD to also own AUD, CAD, CHF, and NZD is to protect myself from becoming Anna Eisenmenger, the Austrian doctor’s wife who kept a diary about her family’s experience with hyperinflation in Austria and Germany in the early 1920s. So my only question is whether the Swiss government and people, since they make a lot of decisions by referendum, will choose to print so many CHF that they hyperinflate their currency, that is, render it worthless. Given that Switzerland is and was a next door neighbor of Austria and Germany, I do not believe they are going to wipe out the value of all the Swiss francs on earth in order to protect Swiss export and tourism jobs.
I am not interested in temporary minor issues like recessions in Australia or the Swiss government’s attempts to persuade the world not to raise the value of their currency. The world market simply does not believe that the Swiss attempts to talk down and drive down the value of its currency are real or that the Swiss government and people will commit financial suicide of the type they witnessed so closely and painfully 90 years ago. Also, the world market is bigger and stronger than the Swiss government, just as it was bigger and stronger than the much larger British government on Black Wednesday in 1992.
I see the pending USD hyperinflation as a tidal wave—bigger than the Great Depression. People telling me about pegs and recessions falls on my ears as if they were talking about an abnormally high tide. As if I were buying real estate 200 feet above sea level to avoid tidal wave damage and the person I am talking to tells me, “But there’s a high tide coming Tuesday and when it does, you will only be 196 feet above sea level.” I don’t give a damn about those four feet.
|-Because of the very low interest rates and all the foreign capital coming in, there's a real estate bubble in Switzerland. When it blows up, the state might have to save the banks and
|Real estate bubbles do not require bailouts, only mortgage bubbles do. Have Swiss banks made all sorts of imprudent mortgage loans? I had not heard that.
|the low national dept. levels could shoot up Irish style.
I get Google Alerts daily which are the first ten results of a automated Google search for the phrase “Swiss franc trouble.” Ditto for AUD, CAD, and NZD. I constantly monitor the national debt-to-GDP ratios of the countries I have recommended and invested in and I expect over time that my four countries will change. For example, if the euro zone ends, all this pegging stuff will change. Among other things, that would probably cause me to switch to Swedish and Danish currencies. They have better ratios than Switzerland.
Swiss francs have been rock solid and a haven for a century. Anna Eisenmenger’s Vienna banker told her to trade her Austrian krone for Swiss francs IN 1918!. She did not follow that advice and lost 3/4 of her money as a result.
Ireland has never been known as a financial center. They suddently went nuts in finance in the 2000s and promptly went bust. Can Switzerland turn itself into Ireland after a century of good financial management? It’s possible, but it seems less likely.
|The once pristine reputation of the Franc might suffer from this and the Euro peg.
The once pristine reputation of the US is shot to hell because of our imitation of the European welfare state and our impending need to “print” the money to pay those insane bills. My impression is that the Swiss government is not structured so as to enable politicians who care about nothing but the next election to go against the will of the people as much as ours can here in “the land of the free and the home of the brave.”
I am not concerned about reputation or a voluntary peg. I am concerned about the Swiss national debt-to-GDP ratio and I will chuck the CHF in a New York minute if it heads upward—probably at a loss.
|-So personally, as a Swiss investor, I don't have much trust in our own currency and prefer to hold stocks all over the world
This Swiss reader needs to read the stock market chapter of my book How to Protect your Life Savings from Hyperinflation & Depression, 2nd Edition.
After she lost 3/4 of her money by not getting out of the Austria krone Anna Eisenmenger followed her banker’s then advice and put the rest in the Austrian stock market which skyrocketed, until it crashed in 1924, wiping out the rest of her savings.
During the last period of high inflation in August 1979, Businessweek famously published a cover story titled “the End of Equities: How inflation is Destroying the Stock Market.”
When I was in my 20s, bonds were said to be bad in high inflation—which is correct—and stocks were said to be good in high inflation because companies could raise their prices. In fact, high inflation has both direct and indirect effects on stocks. Price raises can only happen if there are no government wage and price controls, but the government almost always imposes those during high inflation. Also, whether a company can raise its prices depends on the income sources of the customers. For example, if the company sells to retirees, like cruise lines, they cannot raise their prices because pensions, even with cost-of-living clauses, cannot keep up with high inflation. Also, companies have balance sheets just like individuals. In hyperinflation, their cash becomes just as worthless as mine. At the moment, U.S. companies are sitting on mountains of USD. That is an extremely bad idea given that we are about to get hyperinflation. Hyperinflation will also devastate the accounts receivable and any loans owned by the corporations. And it will make any fixed-rate USD debt they owe drop to zero in real terms.
The indirect effect of hyperinflation is a severe economic disaster which will hurt the profits of all companies.
In short, the direct and indirect effects of hyperinflation on corporations and their stocks are a total crap shoot.
|and some gold bullion.
See my web article at www.johntreed.com/golddisadvantages2.html. Much of what it says pertains to US investors but not Swiss investors. However one thing it says does pertain to this Swiss reader: the historical average price of gold in 2011 dollars is $642 an ounce. If my Swiss reader paid that or less, he has done well. If he paid more, like today’s price of $1,553, he has a built-in loss of about $900 per ounce.
Also, I read the books When Money Dies; Blockade, the Diary of an Austrian Middle-Class Woman 1914-1924, and I saw the silent film the Joyless Street. They are about the early 1920s hyperinflation in Austria, Germany, and Hungary. The word “gold” was almost never mentioned. In one time it was, Anna had to barter her late husband’s gold watch chain for four bags of potatoes. Barter typically results in trading the formerly very valuable for the formerly very cheap. Gold is a barter commodity. There was no “Thank God I bought gold” or “If only I had bought gold” in any of the three. Rather, what rang out clear as a bell was that having foreign currency—almost anything other than Austrian krone, German marks, and Hungarian whatevers, was salvation. Middle class and even poor visitors from other countries were treated like kings because they had French or Swiss francs or British pounds or Dutch Guilders or USD. Foreign currency that is not hyperinflated has great advantages over gold—it is extremely liquid, requires no assay, and comes in convenient denominations.
Whatever the reasons, gold was not spoken of much in those three sources about the details of what it was like to be in those countries in the early 1920s. Un-hyperinflated foreign currencies, on the other hand, were “gold,” if you’ll pardon the expression.
|-If you really want easy exposure to the Swiss Franc, you could also buy some stocks like Swisscom that generate almost all their revenues in Francs and pay a nice 6% dividend yield.
|The fear level in the stock markets is so high that you generally get twice the dividend yield from a stock of company than of its bonds. I am fully aware that stocks will be very volatile in a hyperinflationary environment, but at least you will preserve a part of your wealth and still have the chance to even make some real capital gains.
One of the recurring themes in all the financial crisis books I have read in the last three years (the list is in the bibliography of my hyperinflation book) is that time and again people lost everything because they insisted on a couple of more points of yield and were too unmindful of risk and capital preservation. There are a number of poignant comments to that effect in Benjamin Roth’s Depression Diary. I will not be making that mistake. I do not need the 6% or the chance to make some real capital gains. I do need the life savings.
Our main asset is home equity. We have plenty of opportunity there to make real capital gains from hyperinflation because we have a substantial fixed-rate, 30-year, 4.125% mortgage. And unlike stocks, we get to live in it.
|Because of my wife, we have a bunch of stock index funds. I expect that this Swiss reader has far more money in Swiss franc-denominated assets than I do and that I have far more money in USD than he does. I am really diversified in five currencies, not four, with the USD being the fifth. Although I probably now have more cash in foreign currencies than in USD. My Swiss reader probably has a higher percentage of his cash in Swiss francs than I have in USD or CHF.
Peter sent a second email which is excellent. Here it is with [my responses]:
I am fine with your replies and would partly agree with some of them. Some things just can't be known like the question when Switzerland will abandon the peg. I am only saying that for the time being, the Swiss National Bank seems very determined to keep it and has the full political support of all major parties for it. But I would agree that Switzerland will probably abandon it and stop inflationary policies sooner than most countries.
With regard to the hyperinflations of Austria and Germany: It seems that your basing your replies mainly on the anecdotal evidence from Anna Eisenmenger. [Also When Money Dies and The Joyless Street and a lot of other books’ general comments on Austria and Germany in the early 1920s; Anna’s firs- hand accounts were the most riveting.] You can find further interesting anecdotes in Erich Maria Remarque's 'The Black Obelisk' and in Stefan Zweig's 'The World of Yesterday'. For more empirical data, the best reference work for the German hyperinflation is 'The Economics of Inflation' by Constantino Bresciani-Turroni with detailed charts and statistics. For business owner, there is 'The Hyperinflation Survival Guide' by Gerald Swanson, based on the more recent hyperinflations in Latin America. [I will track those down and read them. I already read the Hyperinflation Survival Guide and quoted it in my hyperinflation book. Gold was little mentioned there either.]
Stocks didn't look good in the German hyperinflation and yes, they gyrated wildly between the cycles deflationary credit crunches and new bursts of inflation (think 2008 and 2009). But they preserved at least part of their purchasing power. And if you mainly buy stocks of companies with foreign revenue streams, you could do better.[I am not saying broad foreign (from the standpoint of a Swiss resident and international stock index funds will not do well, only that they have not been reliable havens. They may work during USD hyperinflation.]
Foreign currencies and gold even got ahead by 4x in real times for some time. One important point to consider here: All major foreign currencies like the Dollar or the Swiss Franc were actually fully backed by gold under the gold standard system. So it didn't really matter which one you owned as long as you owned a gold backed currency. That's probably also the reason that nobody talked about gold in Eisenmenger's book as Dollars or Francs were still as good as gold then. [Foreign currencies were also “gold” in the Hyperinflation Survival Guide which was about the 1980s—long after the gold standard ended. The issue is not gold backing, but trust. People wanted foreign currencies in the 1920s in Austria and Germany and in Latin America more recently because they trusted the foreign currencies in question not to hyperinflate. Gold backing was one of the reasons for that in the 1920s, but the U.S. government prohibited U.S. residents from owning bullion gold starting in 1933 and reneged on gold certificates which had been explicitly backed by gold. In the 1980s in Latin America Latinos trusted the U.S. dollar would not hyperinflate in spite of lack of gold or any other metal backing.] One can forget jewelry as it is only 10% gold and 90% artisanal value that you are buying. [Jewelry does not makes sense as an investment if you buy it new from a retailer, but once you own it, or if you buy it in a setting where you eliminate the 90%, it is still partly gold and has some barter value during hyperinflation. It and rare coins also were not ordered to be turned into the government in 1933.]
That all changed in 1971 and by buying currencies you now have to make bets about the future of their central bank policies. [Precisely, and on their fiscal policies—taxing, spending, and borrowing—and that is precisely what I am doing when I look at the histories of countries, their debt-to-GDP ratios, and their corruption and economic freedom rankings.] Personally, I look at gold as a currency that can't be inflated at will. [True, but it can be and has been inflated by irrational exuberance including recently. There must be a price at which gold investors say it is too expensive. One of my criticisms is that gold investors seem to have no such price. No other asset is ALWAYS alleged to be a great investment no matter it’s price.] Global gold mine production is about 2600 tons a year and the global gold stockpile is about 150,000 tons, so the global gold supply grows by less than 2% per annum – and that won't change much as global mine production today is not higher than in 2001 despite the rising price of gold. So based on the experience of the 1920s, 1930s and 1970s, I began to buy gold in 2003 – not only the preserve my wealth, but to get ahead in real terms. [You should have switched to some other commodity when the gold price exceeded about $700 an ounce in 2011 prices.] Of course, if you miss the exit at the top of inflationary policies, you can actually lose a lot with gold in real terms like from 1980 to 2001. [Make it 1980 to the present. Gold has never regained, or even gotten close to, the high point it reached on January 21, 1980 (about $2,235 in 2010 dollars) adjusted for inflation.] My main indicator in this regard are real interest rates. As long as they are very low or even negative, a rise in gold and silver prices is likely,…[I think that is incorrect. The way I would say it is that negative real interest rates mean that you should look for another relatively liquid asset in which to invest your money, but you must not go to precious metals or any other asset that happens to be priced by irrational exuberance at the moment. Also, in the U.S. there are a number of unique reasons to shun precious metals, like the 28% long-term capital gains tax rate on them and the history of confiscation of bullion gold in 1933.]
So if the Fed or the Swiss National Bank were to raise interest rates to a 4% real rate or more soon, which currently means a 7% Fed Fund rate in the U.S. and maybe 4% in Switzerland, I would sell all my gold. But we both know this won't happen before people get fed up with inflation and another Paul Volcker comes around like in 1979. [Correct—and that new Paul Volcker needs to be backed up by a president like Reagan who will not demagogue his efforts to end inflation. Also, Paul Volcker’s cure was high interest rates and lower money supply which caused disinflation. After hyperinflation, disinflation is not strong enough medicine. You have to totally replace the discredited currency. In other words, the cure for our impending hyperinflation will be replacing the U.S. dollar with a new currency that has a new name and that provides some persuasive reason to trust it. I prefer the Zimbabwean cure: just end legal tender laws and tell people to use whatever they want. Plus, the government would then need to select some currency that they will accept for taxes and fines.]
With regard to the Swiss real estate bubble: Real estate prices have been rising faster than GDP and income levels for more than 10 years and mortgage debt levels even faster than that from an already very high level. [That’s a bubble all right.] Cap rates are going down and are now in many cases below 3% and even at 0% in some preferred locations. Lending standards may not be as bad as they were in the U.S. (there are no zero down mortgages), but they are certainly deteriorating.
So personally, I don't trust our Swiss central banks and politicians and keep 90% of my wealth in stocks and gold, not Swiss Francs. [Familiarity breeds contempt. The world is rushing into USD just as I and my readers are rushing out of them. And you and I are passing each other going opposite directions on the CHF. Mildly humorous. But fundamentally, you and I each still own plenty of our own currency. We are each diversifying into other assets and that is a good thing. Pursuant to my new rules, if you want to criticize one of my recommended currencies, including your own country’s, you must prove it will hyperinflate more than the USD in the next five years and tell me what currency to replace CHF with. Instead, you seem to have done like all the other critics: find fault with Switzerland, but not fully address the question of whether Switzerland will hyperinflate more than the US in the next five years and you have not told me what currency is better than the CHF to keep my diversification portfolio at four non-USD currencies. Finding fault is easy. But I have been a professional how-to writer for 41 years. How-to writers identify best practices and explain why they are best and why competing best practices are not and motivate the readers to switch to the correct best practices. Finding fault with Switzerland or Australia or whomever is not a best practice. You must continue your argument out to the best-practice point.]
Urban myth about Swiss francs becoming replaced and needing to be exchanged physically in Switzerland for new ones
An American reader sent me this.
Do you plan to exchange the 8th (current) series of Swiss banknotes to the ninth series when they become available, scheduled to be issued in 2012? Going to Switzerland's main bank in Switzerland that issues and exchanges the "old" currency could be tricky, getting through customs? Or maybe the 8th series would be good for a few more years. I've googled this, but can't find an answer. And the answer probably needs to come from the Switzerland's main bank in Switzerland that issues the new currency.
My banker/bank examiner wife and I doubted Switzerland would do such a thing. It sounds like some stunt a banana republic would pull. I created a Google Alert to give me daily search results on that topic. To date, I have received zero such alerts. I also have alerts for the foreign currencies I own and get Google Alerts on each of them daily.
Here is what my currency trader, who was recommended by my Canadian bank, says,
I've spoken to my bank note manager and he told me that we have NOT been updated or informed about the new series of CHF notes coming out this year. We are usually informed within 3 to 6 months before any changes on bank notes. The current notes that you purchased should not lose any monetary value when the new series comes out and will always retain full value within Switzerland and even elsewhere. The CHF is considered a major worldwide currency, so at this point in time I wouldn't be concerned.
Although here is a comment from Wikipedia about legal tender in Switzerland:
The sixth series of Swiss bank notes from 1976, recalled by the National Bank in 2000, is no longer legal tender, but can be exchanged in banks for current notes until April 2020.
Mine are eighth series.
John T. Reed
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