The power of the Executive to cast a man into prison without formulating any charge known to the law, and particularly to deny him the judgment of his peers, is in the highest degree odious and is the foundation of all totalitarian government whether Nazi or Communist.
—WINSTON CHURCHILL
President George W. Bush, in explaining to the nation why members of al-Qaeda attacked the United States on September 11, 2001, told us, “They hate our freedoms.…” Let us ignore, for the sake of argument, the sheer idiocy of his analysis, and consider his response to the terrorists. He accommodated them. In the context of his own argument, his decision was to give them what they wanted. Within six weeks of the attack, Bush signed legislation that deprived American citizens of liberties that they had enjoyed for more than two hundred years, the very freedoms, according to him, that the terrorists hated.
The Patriot Act, the legislation Bush pushed for and signed into law, and within the constraints of which we Americans now live, includes the kinds of provisions with which the jihadis of al-Qaeda are eminently familiar. It incorporates the kinds of statutes that hold sway in the countries where they live, authoritarian states, where denial of rights by the government helps produce terrorists like them. Now we, too, live in a nation of warrantless wiretaps, unreasonable searches and seizure, indefinite detention, and institutionalized torture. Just like them. Now we, too, have a domestic surveillance apparatus, the ominously titled Department of Homeland Security.
Having a problem with one of your neighbors? You do not like the smell of his food? Drop a dime on him, call Homeland Security, say that the guy has been acting strange. The government will dump him in Gitmo for five or six years, throw him some questions, get him out of your hair for a while. An American citizen? Nobody cares. In Yemen, in September 2011, the CIA dropped a drone on two American citizens. Guilty? Perhaps. One will never know. No arrest, no lawyer, no judge or jury, no trial … There is a secret committee that handles these things now. It is a new day in the land of the free.
Certainly, in America, in the course of our history, we have had our share of lynch mobs, innocent people being persecuted by the state and the mob. But at least in theory, if not always in fact, safeguards against such persecution existed. At least in theory, the government was prohibited from executing even guilty people without trial. What has changed is not that the government has overstepped its authority—Abraham Lincoln went as far as to suspend habeas corpus—but that the government’s doing so has become acceptable, celebrated in some cases.
I have learned to distrust the government—I recommend that every American do so—and my skepticism has been evident for at least forty-five years. While attending Officers Candidate School at Fort Lee, Virginia, in 1967, I joined one hundred thousand or so war protesters in that year’s famous march on the Pentagon. I fear, however, that my skepticism is merely generational. My father’s generation, or so it seemed to me, believed everything it was told. And the generation that is coming of age today is reminiscent of my father’s much more than it is of mine. Not that Americans today believe everything the government says, but that they somehow feel no need to believe it. From the body counts of Vietnam to the equally fictitious justifications for invading Iraq, little has changed except the public’s willingness to swallow government distortions and spin. Truth is the first casualty of war, it is said, and while that proposition has always been descriptive, it has now become weirdly prescriptive: the US political establishment has taken it to mean that war grants the government the license to lie. And what better way for elected officials to run the country than by keeping the nation perpetually at war, as it has since 2001.
The United States was founded on a principle that was decidedly foreign to the rest of the world in the late eighteenth century: that your rights are not something the government gives you, but something the government cannot take away. It was a revolutionary notion, and it took a revolution to make it real. Well, we are not that country anymore. We are now a country where the primacy of the individual is subordinated to the prerogatives of the state.
In 1980, we elected a president who paid lip service, if nothing else, to the majority’s desire to “get government off the backs of the people.” In 2004 we reelected a president whose popularity derived from his implied promise to keep the people off the government’s back. We are now finally structuring a government like the ones that immigrants and refugees for two hundred years have been coming here to escape. We have outgrown our founding fathers. We are now the sons and daughters that one of them, in 1759, warned against our becoming.
“Those who would give up essential liberty to purchase a little temporary safety,” said Benjamin Franklin, “deserve neither liberty nor safety.”
Content to give up our claim to being the land of the free, we as a nation, by lying down and ceding our rights to a government that induces us to be frightened, will find it somewhat problematic to describe ourselves as the home of the brave.
BY THE TIME this book is published, a law will have taken effect that makes it effectively impossible for Americans to open bank accounts outside the country. Say you are an executive at Ford, and you are transferred to its German subsidiary. You open a local bank account to pay your bills and to withdraw euros. Under the Foreign Account Tax Compliance Act (FATCA), scheduled to take effect January 1, 2013, it may prove too onerous for that foreign bank to keep you as a customer.
It has long been a requirement that Americans report all their foreign bank accounts to the US government, as I do when paying my taxes. But already the officers of two foreign banks where I have had accounts for years—the existence of which I have routinely reported, as required by law—have called to say, sorry, we love you, but we do not take Americans anymore, and we are getting rid of the ones we have. Why? Because the disclosure requirements that have always been my responsibility are now being imposed upon them, and in even more burdensome form.
Under the new law, foreign institutions that do not sign an agreement with the IRS to police US customer accounts face a punitive 30 percent withholding on their American-derived proceeds. These institutions do not consider themselves branches of the US Treasury Department; they are not being paid to do all the extra work necessary to identify and file reports on their customers—imposing taxes on certain customer deposits; and finding the exorbitant costs of such compliance prohibitive, they are just closing out American citizens. There is always the added risk of suits and fines, even if there is a mistake, so the efficient solution is to bar Americans. European banks like Deutsche Bank, Credit Suisse, and HSBC started closing all US brokerage accounts in 2011.
The fear of capital flight as a result of the law appears to be justified. I am told that in London there is a six-month waiting list to give up your American citizenship, in Geneva a fourteen-month wait. The number of people who did this fifty years ago, even thirty years ago, was minuscule. Probably the most famous example is John Templeton, the billionaire mutual fund pioneer and philanthropist who renounced his American citizenship in 1964 to avoid paying more than $100 million in taxes on the sale of his international investment fund, Templeton Growth. He took up residence in the Bahamas and became a naturalized citizen there and in the United Kingdom.
Today, for such renunciation, there are waiting lists. At the US Consulate in Singapore, there is a price list on the wall, itemizing the charges for various services, and both this year’s and last year’s prices are posted. Recently I was at the consulate to renew a passport, and I noticed that the charge for renouncing your citizenship today is $450. In 2010, it was free (up until July of that year). And there was a time, apparently, when you could just walk in and do it without an appointment. Now, of course, you need one. You have to go through a procedure in which a consular officer has an opportunity to talk you out of it, sending you away, telling you to come back, using delaying tactics and whatever else it takes to dissuade you, in part to protect you—to make sure that your renunciation is voluntary and intentional—and in part because renouncing your citizenship these days has become something of a movement.
The inability of Americans to keep foreign accounts is only one reason behind the trend. Banking regulations under the Patriot Act are making it increasingly harder for Americans living abroad to keep accounts in US-based banks. According to American Citizens Abroad, an advocacy group based in Geneva, the US banks, cowed by the antiterrorist provisions of the act, are closing the accounts of longtime customers with addresses outside the United States “as acts of prudent self-defense,” the result being that expatriates have now become “toxic citizens.”
The United States is one of the few countries in the world that impose taxes based on citizenship rather than residency. American expatriates are subject to double taxation. They pay US taxes on top of the taxes they pay to the countries in which they reside. If you give up your US citizenship and you have a net worth of over $2 million, there is an assumption that you are doing it for tax reasons. Your wish may be to become a Buddhist monk and live penniless in the hills of Tibet. But if your net worth, marked-to-market, exceeds the aforementioned $2 million (or your average net tax liability for the previous five years surpasses a certain threshold), the government says you are headed to Shangri-La, not to meditate, but to avoid taxes. And therefore you have to pay an expatriation tax, an exit tax calculated on the value of your assets. The Economist called it America’s Berlin Wall. The United States has joined the former East Germany, North Korea, Cuba, Iran, the former USSR, and 1930s Germany on the list of countries with laws engineered to keep citizens in, and in some cases prevent their return should those citizens manage to leave.
SO FAR, under FATCA there is a $50,000 threshold. On US customer accounts under that amount, foreign banks need not report. Normal checking and savings accounts in most countries have yet to be affected. But it is probable that very soon I will be unable to maintain a bank account locally to pay my electricity bill. Unless, of course … Yes, Citibank has a branch in Singapore. I do not have an account there, but it may be that if no other bank will take me, then I and all the other Americans in Singapore will have no choice but to transfer our accounts there, or to one of the other American banks (Chase and Bank of America) that also have branches here.
If members of Congress had that in mind when they wrote the new law, as some European bankers believe, the law can be seen as a form of protectionism. It can be viewed as a restraint of trade. And it would not be naive for foreign bankers to assume that Citibank probably helped write it. Citibank does have an extensive offshore network, and Congress does have a way of protecting its friends.
In 2005, the US House of Representatives prevented the Chinese National Offshore Oil Corporation (CNOOC) from acquiring Union Oil of California. Unocal is now a wholly owned subsidiary of Chevron, America’s fourth-largest corporation. In 2006, under pressure from Congress, Dubai Ports World was forced to sell its newly acquired terminal operations at American ports to a division of US insurance giant AIG—despite Dubai’s being one of our staunchest allies (part of the US fleet is berthed there). Politicians hollered national security, but restraint of trade on behalf of their constituents was what motivated each of those efforts.
We did it to the Chinese, we did it to our great ally the United Arab Emirates, and soon thereafter other countries, like France and Brazil, were following our lead, taking cover from our willingness to engage in protectionist measures. When Brazil put tariffs on cars imported from China, it cited Congress’s continuing threats to slap tariffs on the Chinese, as US representatives beat their breasts over China’s currency manipulation. The prevailing international sentiment is that if America can do it, so can we. The world is flirting with the “beggar thy neighbor” policies that deepened the Great Depression.
The stock market crash of 1929 brought down some rich people, mostly the investors attracted by the bubble that preceded it, but Americans directly affected by the popping of the bubble were few in number. It was not the crash itself, as dramatic as it was, that made the Depression “Great.” Certainly, the coming economic setback would have been somewhat worse than normal—in those days banks could buy stocks, and a lot of small banks around the country got in trouble as a result of the mania—but then along came the politicians. The Smoot-Hawley Tariff enacted in 1930 and the subsequent retaliatory tariffs leveled by US trading partners turned what would have been a worse-than-normal recession into the Great Depression.
We do not have an outright trade war yet, but we are taking small steps in that direction. The rising tide of protectionism can be seen in restrictions on the free flow of capital. Call it “beggar thy neighbor’s currency.” Seeking security and high return for their money, people should be allowed to move it wherever they wish. Impeding its movement across borders encourages malinvestment, creating distortions in a nation’s economy.
When a country’s economy is in trouble—when it has a balance of trade deficit, for instance, and when its debts are mounting—and when the currency, therefore, is declining in value because everybody can see that the economy is bad, politicians, throughout history, have found a way of making things worse with the imposition of exchange controls. They run to the press and they say, “Listen, all you God-fearing Americans, Germans, Russians, whatever you are, we have a temporary problem in the financial market and it is caused by these evil speculators who are driving down the value of our currency—there is nothing wrong with our currency, we are a strong country with a sound economy, and if it were not for these speculators everything would be OK.”
Diverting attention away from the real cause of the problem, which is their own mismanagement of the economy, politicians look to three crowds of people to blame for the regrettable situation. After the speculators come bankers and foreigners. Nobody likes bankers anyway, not even in good times; in bad times, everybody likes them less, because everybody sees them as rich and growing richer off the bad turn of events. Foreigners as a target are equally safe, because foreigners cannot vote. They do not have a say-so in national affairs, and remember, their food smells bad. Politicians will even blame journalists: if reporters did not write about our tanking economy, our economy would not be tanking. So we are going to enact this temporary measure, they say. To stem the scourge of a declining currency, we are going to make it impossible, or at least difficult, for people to take their money out of the country—it will not affect most of you because you do not travel or otherwise spend cash overseas. (See Chapter 9 and the Bernanke delusion.)
Then they introduce serious exchange controls. They are always “temporary,” yet they always go on for years and years. Like anything else spawned by the government, once they are in place, a bureaucracy grows up around them. A constituency now arises whose sole purpose is to defend exchange controls and thereby assure their longevity. And they are always disastrous for a country. The free flow of capital stops. Money is trapped inside your country. And the country stops being as competitive as it once was. If you are producing tractors in the United States, say, and exchange controls are imposed, you reap an advantage from the difficulty that Americans have in getting their money out of the country to buy tractors from Germany. You and other domestic manufacturers, protected from such competition, get sloppier and sloppier, the quality of your product goes down, prices go higher and higher, and the nation’s economy gets worse and worse.
The United Kingdom imposed exchange controls in 1939, and for the next forty years the country continued to deteriorate. As I pointed out earlier, not until Margaret Thatcher removed the controls in 1979 did the economy (with the help of North Sea oil) begin to improve. Currency controls more recently have constrained growth in places like China, where an inefficient allocation of capital is one cause of that country’s inflation. The money has to go somewhere, and with not enough flow in and out, one of the places it has been going is into property. There has been a real estate bubble in China, which will lead to bankruptcies in the next few years.
Something like four trillion dollars’ worth of foreign currencies trade every day. It is the largest market in the world. From the tourist on a package tour to Europe to people buying and selling oil around the world, all are in the currency market. There are short-term traders who are in their positions for three minutes, three hours, three days, and there are long-term investors like me.
I mainly own commodities and currencies now, and gauging the political winds, I look for more turmoil in the currency markets. For the smart investor, many more opportunities will emerge there. There are many ways to invest in currencies. You can buy futures and get enormous leverage. You can open a bank account; you can buy bonds: Swiss government bonds, for instance, in Swiss francs, or German government bonds in euros. It is now legal for American banks and brokerage firms to offer you foreign currency accounts. New instruments are becoming available. You are going to see more exchange-traded funds (ETFs) and more mutual funds invested in currencies, as Americans catch on and start putting their money abroad.
Eventually the government will react and institute exchange controls, as governments, throughout history, have always done. Washington will close down foreign currency markets for Americans, which will be a disaster, adding one more layer of grease to the skids of America’s decline. But until that time, until the day bureaucrats, snarling about evil speculators and suspicious foreigners, find it politically advantageous to close the market, many more people will be investing in currencies.
In 1994, with economic problems of various kinds, China devalued its currency, setting it at a certain value against the US dollar. How smart, said Washington at the time, what geniuses these Chinese are, pegging the renminbi to the US dollar; now their economy will grow and develop in a positive way. Today, of course, Washington is shrieking at the Chinese for doing so. Those evil, filthy Communists, their economy has boomed and we are suffering, and it is all their fault for holding down the price of their currency. In 2005, the Chinese allowed some flexibility into the currency, letting it fluctuate upward a little bit, and since then it has appreciated maybe 30 percent. In a free market, it would probably have gone up more, and that is what Washington is waxing hysterical about, and in the most clueless of ways. Politicians in the United States are actually saying out loud: “We want the value of our nation’s money to go down,” which is what happens to the dollar when the renminbi goes up. Politicians are bashing Japan and other countries with the same line.
Now, I am an American citizen, and I do not particularly want the value of my currency to go down, but here are these elected representatives of mine screaming to debase the dollar. At the same time this is going on, little Timmy Geithner is running around saying, “We are in favor of a strong dollar.” It is a mantra of the US Treasury and has been a mantra for decades, even as the national currency has been declining steadily over that time. A dollar as strong as the nation is Washington’s promise to the people, yet, as soon as one of these characters goes abroad, to China, to Japan, the first thing out of his mouth is, “We want your currency to go up” (and ours to go down). The next day, it is back to basics, insisting to some reporter, “We are in favor of a strong US dollar.”
The fact is that these politicians and bureaucrats, including the secretary of the Treasury, know little about currencies. They speak out of both sides of their mouths, often at the same time, and will say whatever is most politically expedient at the moment.