Gold Forecaster
- Global Watch
Capital Exchange Controls
for the U.S?
Julian D.W.
Phillips
May 19, 2006
Excerpts
from "Gold Forecaster - Global Watch."
 Capital Exchange Controls for the U.S?
We described how
if the U.S.$ declined substantially, it could lead to Capital
Controls to protect against foreign governments' withdrawal of
their investments in the U.S.A. Of course this would be in a
global climate of severe trade disruption with many nations instituting
trade protection measures as well as being prepared for Capital
Controls to protect their nation's capital base. The U.S. would
be particularly likely to impose Capital Controls because of
the huge volumes of externally owned U.S. currency.
How would such controls be
imposed? The first point of protection and control would be the
U.S. Treasury market, where discouragement from selling would
be heavy. Thereafter history guides us to the most pertinent
example, the decline of the previous global reserve currency,
the Pound Sterling.
This reached crisis stage as
both the $ and the Pound were 'floated' in 1971. With the U.K.
no longer the prime economy on this earth, a mantle it had passed
to the U.S. $, it had to protect itself against the outflow of
foreign capital from its shores.
The way it chose was to leave
international trade alone, permitting all trade transactions
to flow through the foreign exchange rate against the $ as quoted
on foreign exchanges prior to the imposition of Capital Controls.
For want of a better title we shall call this the "Commercial
Pound".
However, the Bank of England
separated all Capital transactions from the Trade transactions
and required all incoming and outgoing transactions to go through
authorized dealers [Banks, Stockbrokers primarily]. They had
to go through the "Dollar Premium" a title aimed at
all who wished to bring capital into the country.
All who wished to take capital
out had to pay that "premium" [a discount to the $
exchange rate varying from 10% to 30%]. Of course anyone
who had foreign investment to bring into Britain had to do so
through the Dollar Premium and gained the benefit of the Premium
as it added that to the capital imported. Thus new investors
to Britain gained up to a 30% "premium" with which
to invest in Britain.
As gold was rising, gold shares
then quoted on the London Stock Exchange as well as in Johannesburg,
were extremely popular. The transactions could prove complex.
For instance, if a Swiss banker wished to buy South African gold
shares, he bought in London.
To do this he had to convert
his Swiss Francs into U.S. $s send them through the "Dollar
Premium" where they were changed into Sterling and the South
African shares bought on the London Stock Exchange for Pounds.
However, the loss achieved
on the export of funds from the U.K did discourage the capricious
dis-investors. The desire to export the foreign owned [or locally
owned funds seeking an exit] funds was measured by the rate the
Premium rose to, which peaked at +30%. After a few years the
rate diminished back to 10% before it was abolished. It acted
simply as an escape valve, taking away excessive pressure, but
keeping the bulk under pressure and contained.
There have been far worse systems
of Exchange Controls in different countries.
- In South Africa, Exchange
Controls have been a fact of life since the sixties with a small
break only and remain to this day.
- In Zimbabwe exchange Controls
have been in place since Smith declared Independence and broke
away from Britain until now, where the most effective form of
exchange control exists, a worthless currency and a destroyed
economy undergoing hyperinflation.
Of course, should this happen
to the globe's prime economy, the U.S., the ramifications for
the rest of the globe could prove horrendous!
In the U.S. were such controls
to be imposed we would expect the U.S. liquid assets [Bonds and
Bills] to experience controls first, but thereafter the foreign
exchange markets would have the controls imposed on them in a
similar manner to the U.K. in the early seventies.
In the next part we will look
at just how Capital Controls could appear in the U.S. should
it need to protect itself from a flight of capital. The effects
it will have within the U.S. will also be examined, as will the
ripple effects outside the U.S.
May 19, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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