As the global economy implodes, governments throughout the world have responded…
In the United States, Congress, the Securities & Exchange Commission, the Treasury Department, and the Federal Reserve Board have imposed various emergency measures intended to shore up the economy.
Congress has approved a US$810 billion (is that right?) Wall Street bailout, now enacted into law by President Bush. The SEC has banned short selling of financial stocks. The Fed has traded hundreds of billions of dollars of banks’ distressed mortgage debt in for Treasury bills.
However, we’ve only seen the tip of the iceberg when it comes to measures the government can impose in dealing with this crisis. Today, without further legislation, the President can at the stroke of a pen declare a “state of national economic emergency” of potentially unlimited duration. Once he does so, under existing law and precedent, he may:
- Impose a national banking “holiday” closing all U.S. banks or restrict and ration cash withdrawals and the cashing of checks or drafts. President Franklin Roosevelt used this authority in 1933 to closet the U.S. banking system after a run of bank failures.
- Shut down all stock and commodity exchanges. President Wilson invoked this authority in 1914 to shut down U.S. financial markets for four months.
- Impose punitive taxes on inbound or outbound foreign investments. President Kennedy invoked this authority in 1962 to shrink U.S. capital deficits and support the U.S. dollar.
- Investigate, regulate, or prohibit the importing, exporting or holding of currency, securities or precious metals. President Franklin Roosevelt used this authority in 1933 to order the sale of all privately held gold in the United States to the federal government. President Nixon invoked similar authority in 1972 to end the ability of foreign central banks to exchange U.S. dollars for gold.
With few exceptions, the U.S. Supreme Court has repeatedly upheld such seemingly unconstitutional takings as legitimate uses of the president’s war or emergency authority.
I don’t believe President Bush will assert any or all of these powers unless he feels that he has no choice. However, one event that he won’t be able to ignore would be if the U.S. dollar were to suddenly and sharply decline in value.
The dollar has sharply rebounded in value against other currencies in the last few months. However, foreign central banks hold more than US$3 trillion in U.S. dollars. You can imagine what might happen to the value of the dollar if these central banks begin selling dollars en masse.
we’ll look at what you can do to insulate yourself from such far-reaching and powerful efforts.
If you have property that you believe may be at risk for some future expansion of emergency or wartime controls, you can still legally take action to protect it. Here are some ideas:
- Transfer funds outside the United States and outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, but that may not last if the U.S. imposes foreign exchange controls. This could occur in the event of another terrorist attack on the United States, or if the U.S. dollar falls sharply due to a terrorist incident or financial panic. That possibility may seem remote at the moment, because the U.S. dollar has appreciated sharply in the last few weeks in response to the global economic crisis. But this gives U.S. investors a rare opportunity to invest offshore and convert their dollars to foreign currencies – or to gold – at the most attractive exchange rates in more than a year.
- Use offshore structures to hold non-U.S. investments. This strategy may not only provide protection against domestic judgments, but may also provide a legal means to avoid future foreign exchange controls.
- Hold investments that aren’t subject to U.S. jurisdiction. Your investments located within the United States are the most vulnerable. But foreign investments may also be vulnerable, particularly those denominated in U.S. dollars. The least vulnerable foreign investments are foreign real estate and gold, silver or collectibles held outside the United States. Certain contractual relationships, such as insurance contracts and trusts, may also be configured to avoid U.S. jurisdiction.
- Avoid electronic transactions in U.S. dollars through U.S. clearing networks. Most electronic transfers of U.S. dollars clear through a U.S. clearing bank and ultimately the Federal Reserve. U.S. courts have ruled that funds involved in such transactions are subject to U.S. jurisdiction and thus to possible confiscation. A growing number of countries have set up dollar clearing facilities to clear their own domestic U.S. dollar electronic transactions. Such foreign clearing networks are at far less risk from the U.S. legal system than U.S. clearing networks.
- If you’re a foreign investor with U.S. interests, assess your risk to U.S. emergency or war controls. Investors from any country accused of “sympathizing with” or “harboring” terrorists are at particular risk. So are investors in countries or financial institutions through which terrorists have been accused of operating bank and trust accounts.
- U.S. persons not wishing to live under emergency controls are understandably interested in relocating to lower profile jurisdictions. Many countries welcome affluent retirees or other financially self-sufficient persons.
The prospect of emergency financial controls may appear to be remote. But they’ve been imposed many times in U.S. history. And, as this financial crisis deepens, they may be imposed once again.