Privacy & Security

The One Place They Can’t “Bail In”

  • author Mark Nestmann
  • calendar January 14, 2014

A free lunch is a wonderful thing if you’re not the one picking up the tab. For the last 50 years, that’s what the world’s richest countries – the US, the EU, Australia, and a handful of others –have offered their citizens, in the form of a cradle-to-grave welfare state.

But no one bothered to pay for the free lunch. Instead, these countries borrowed trillions of dollars to keep the party going. That can’t continue much longer. According to the International Monetary Fund (IMF), government debt levels are at a 200-year high.

Last week, the IMF issued its second report in as many months warning wealthy countries that they need to steal (or, as I’d say in polite conversation, “tax”) more of their citizens’ wealth to deal with this debt and avoid economic collapse.

The report says that the only option for doing so is to declare a secret war on personal savings. It suggests “financial repression” (yes, that exact phrase) – the same tools used by the IMF in emerging markets. These tools include bail-ins, higher inflation, interest rate caps, capital controls, and more. The IMF even proposes a “one-off capital levy” – outright confiscation –of 10% or more of private savings. If you live in a cradle-to-grave welfare state, this could soon be the new reality.

Of course, financial repression works only as long its targets – individuals, families, and businesses that have built up capital over years or decades – don’t catch on. And here governments have a big problem. They no longer have the trust of their wealthiest and most productive citizens. That’s a big reason over $20 trillion of private wealth now resides outside the countries where it was generated.

Enter the “Free Port”

If you’re one of these wealthy and productive citizens, you don’t want to keep your savings in your own country’s banks. Heck, even if you have a modest level of assets, there’s still a great case to be made for protecting yourself.

If the banks fail, you can expect a Cyprus-style bail-in, forcing you to absorb some, if not most, of the losses. The IMF’s “one-off capital levy” will also be easy to collect from domestic bank accounts, especially if it arrives unannounced, as the IMF recommends.

You also don’t want to keep your savings in a domestic brokerage account. It’s almost as easy to confiscate 10% of your shares as it is to steal 10% of the money you have in your bank accounts.

Instead, you may want to invest some of your wealth in real “stuff” that exists outside the banking system and that can’t be confiscated by decree or with the click of a mouse. Examples include precious metals, fine art, coins, jewelry, and other concentrated stores of wealth.

But where to keep them? Obviously, not here in the US. And unfortunately, a growing network of international information-sharing and confiscation agreements makes assets held outside your country increasingly vulnerable as well.

That’s where the free port concept comes in. A free port is simply an area where imported goods can be stored free of customs duties or other taxes before they’re exported. Free ports themselves (and their host governments) don’t charge capital gains taxes on sales of goods, but you may have to pay taxes in your home country on any profits realized from these sales. This tax-advantaged status exists because goods stored in a free port are legally in transit, even if they remain there for years or even decades.

Business is booming. In just the last year, giant secured private vaults located in free ports have opened, or are about to open, in Geneva, Hong Kong, Luxembourg, Monaco, Panama, Shanghai, and Singapore. Clients pay monthly or annual fees for secure storage, generally based on the value of the goods they keep there.

It’s easy to see the attraction. In addition to the tax advantages, private vaults aren’t part of the global financial system. It’s difficult – and often impossible – for a foreign government to confiscate the goods kept in a private vault. And the information-exchange and asset confiscation agreements that the US and other high-tax countries have forced low-tax countries to sign don’t apply to assets outside the financial system. (If you’re a US citizen or US permanent resident, though, you must usually file an annual disclosure form acknowledging the value of the goods stored in a private vault.)

What Are You Waiting For?

More and more of the world’s most successful people have learned they can’t trust their own government. They’re preparing themselves for the plundering of their wealth by getting nest-egg assets out of the financial system.

Can you think of any reason not to join them, even if your country somehow avoids the catastrophic initiatives the IMF recommends?

Mark Nestmann

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