14/01/2012: Nowhere to hide from governments in need

When governments need money, they shake down the citizenry. The cudgel of legality may justify measures that are borderline ethical and can amount to slow, torturous bleeding of cash or asset value into state coffers. Present poor finances in many nations signal we may be in for repeated summons to pay.
During a presentation in Hamburg two years ago, I insisted that ultimately the enormous creation of money and the monetization of government debt, we’d been seeing in the US, the UK and also – although indirectly – in Europe, would lead to massive inflation. From this I segued to hyperinflation. Asked in the plenum how to protect against such a scenario, I gave the obvious answers: gold, real estate and everything related to “physical” assets.
Afterwards an older gentleman approached me: “I disagree with you on your last statement regarding good investments in circumstances of hyperinflation. My grandparents mastered the German hyperinflation of the early 1920s well, because they had prime real estate here in Hamburg and also in Berlin. However, once the hyperinflation was over, the German government was still in need of money. So it put prohibitive, even confiscatory, taxes on real estate, and my grandparents lost half their wealth.”
This made me ponder the issue more deeply. The difficulties of developed economies currently are not due to ultra-expansive monetary policies, which could lead to inflation. Governments have a much more profound problem (to which inflation is one solution): the lack of funding of their expenditures going forward. In simple terms: Governments need money and will do whatever they can to find it.
No asset is safe when a government needs money. When President Franklin Roosevelt decided to debase the gold value of the US dollar from one twentieth of an ounce to one thirty-fifth of an ounce (a devaluation of 43%) in 1933, he issued Executive Order 6102 and forbade the hoarding of gold in the US. During the Argentinean crisis in 2001, when the government started to devalue the peso, it introduced the so called “corralito,” freezing all domestic bank accounts (both in pesos and US dollars), and then the “corralón,” forcibly exchanging the deposits (including the US dollar ones) in peso-denominated bonds.
Last year Hungary – in financial need – decided that private pension funds would be de facto nationalized and would help to finance the government debt. France is presently considering introducing a so-called Tobin tax on financial transactions, if needed. This tax, labeled an “absurdity” in 1999 by French President Sarkozy, is in my view more than just a gimmick to woo French voters, punish mean financial markets and to annoy the British. With a debt-to-GDP ratio which will hit 90% this year, a deficit that refuses to decline, and very bleak growth perspectives, France is in desperate need of fresh sources of financing.I think that in the next couple of months and years, with growth remaining subdued due to demographic constraints and with unfunded public liabilities becoming more perceptible, the risk that governments will adopt Procrustean measures to cut their funding needs to size will dramatically increase. Hence we could see more financial repression, capital controls, tariffs and trade barriers and ultimately the decline of globalization.