THE CASE FOR INVESTING ABROAD Historically, currencies always lose their value The following quick history of money has a very important reason. It is important to not only have a feeling that something is wrong, and that United States currency and investments are at risk, but to understand fully the reasons why this is so. It is very important to realize that these patterns of history constantly repeat, and have done so for centuries. The current political rhetoric of a new administration in Washington cannot change the inevitable course of history, nor can it reverse the downhill slide that is well under way. Historically, currencies have tended to fall as economies weaken. Over the long run, all fiat currencies have become worthless. The evolution of money has been a long and often difficult process as societies searched for ways to develop reliable and lasting systems of commerce and finance. Over the course of history, money has changed its physical appearance as people refined its shapes and sizes into convenient and practical forms. At the same time, money's nature has changed. From the days of the Roman gold aureus to the original U.S. silver dollar, money's intrinsic worth -- meaning its precious metal content -- was a paramount measure of its value. Today, money's value is measured not by its material worth in precious metals but by what it can buy -- its purchasing power -- a much less secure measure because historically all forms of money not based on gold have always lost their value. The first early attempt at using fiat currency failed in the fourth century when the Romans began issuing ever-increasing amounts of fiat coins to compensate for insufficient quantities of gold needed to mint the aureus, which was in demand throughout the empire. Huge budget deficits in the Roman government and a loss of confidence in coins caused catastrophic inflation that eventually destroyed the Roman monetary system. Ironically, it was during the post-Roman era that the Roman "solidus" became the most enduring coin in history, circulating throughout Europe and the Near East for more than 700 years. The solidus owes its incredible longevity to its largely unchanged appearance and gold content over time, which helped to maintain public confidence in the coin. While coins remained the primary medium of exchange for centuries, during the Crusades people sought alternatives as travel become more common. The precursor to European paper money was born in the form of "letters of credit" -- promissory notes between two parties that generally could not be cashed by anyone else. The use of these letters was aimed at thwarting highway bandits who wanted coins, not paper, which was impossible for them to cash. The Europeans were not the first people to discover the advantages of using paper money. Its ancient ancestor can be traced back to about 2,500 B.C. to the clay tablets on which the Babylonians wrote bills and receipts. The Tang Dynasty in China issued the first known paper money in 650, and the earliest piece of currency that exists today -- a Chinese 10- kuan note -- dates back to this time. Centuries later, in 1273, Marco Polo reported that the Mongol Emperor Kublai Khan issued mulberry bark paper notes in China bearing his seal and the signature of his treasurers. Marco Polo described the monetary system: "All these pieces of paper are issued with as much solemnity and authority as if they were pure gold and silver...and the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must be equal in amount to all the treasure in the world." With an overabundance of fiat currency in circulation, it is not surprising to learn that the Mongol-imposed monetary system suffered terrible inflation; eventually the Mongols were forced out of China. A major step in the development of paper money took place in 1661 when the Stockholm Banco of Sweden issued the first bank notes, which were private obligations of the bank and could be redeemed there in gold or silver by the bearer. Because redemption in precious metals was guaranteed, many people had enough confidence in the value of the notes to exchange them for goods and services. However, Swedish merchants feared that the notes would be bought up by foreigners who would redeem them and eventually deplete Sweden's gold and silver reserves. The issue lasted only one year. In the 17th century, colonists settling in North America brought coins with them, but most of these were quickly returned to Europe to pay for goods that were not produced in the colonies. This led to a shortage of coins, so Indian wampum -- beads of polished shells strung in strands -- was widely used as money throughout the colonies. However, when settlers learned to counterfeit wampum, it lost its value. In addition to wampum, the colonists also used as money those items that were staples of the local economies because they were always in demand. For example, in Virginia it was tobacco, and in Massachusetts it was grain and fish. Nails and bullets frequently were used for small change. After trade between the colonies and the West Indies developed, Spanish eight-reales coins circulated widely. These coins, known as "pieces of eight." were used until 1857. They were frequently cut to make change: Half a coin was "four bits" and a quarter section was "two bits" -- a slang expression for the modern American quarter. The first coin struck in the colonies was the pine tree shilling -- which bore a picture of a pine tree -- in a Boston mint in 1652. All issues of the coin, even those struck in later years, share the claim to have been minted in 1652, as a legal precaution in case the British Crown decided to enforce its ban on the colonists producing their own coins. Despite the efforts of the colonists, the British shut down the mint in 1686. During the 18th century, again contrary to British wishes, hundreds of different types of paper notes were printed throughout the colonies. Those notes, issued before the American Revolution, usually were denominated in pounds and shillings and made reference to the Crown of England for credibility. Some colonies issued too many bills, however, and their value quickly sank to small fractions of their face amount, making trade between colonies difficult. Despite the depreciation, these bills helped offset economic slumps caused by a scarcity of metallic money in an expanding economy. Before the start of the American Revolution, the Continental Congress, facing huge expenses without adequate taxing power, authorized a limited issue of currency in 1775 -- the first paper currency issued by what was to become the United States. These notes, called continentals, were printed from plates engraved by Paul Revere to read "The United Colonies" and sometimes even depicted colonial minutemen. They had no backing in gold or silver and could be redeemed only if and when the colonies became independent. In January, 1776, the Continental Congress made it treason for people not to accept continentals or to discourage their circulation in any way. In 1777, after the Declaration of Independence, the first notes bearing "The United State" were issued. However, because people were reluctant to accept paper money, well-known revolutionary figures were asked to sign the notes to give them credibility. For about a year and a half, continentals changed hands at close to face value, but this stability was short-lived. Because continentals were issued in massive quantities, inflation ensued. People responded by hoarding goods and coins during the war. In short order, continentals became basically worthless. As George Washington commented: "A wagon-load of money will scarcely purchase a wagon-load of provisions." The currency's vanishing value led to the expression for worthlessness that remains today -- "not worth a continental." The failure of continentals produced a deep mistrust of paper money throughout the colonies. Nonetheless, the brief period when continentals circulated successfully was significant because it marked the first time that the worth of U.S. currency lay in its purchasing power, as it does today, and not in its intrinsic value. After the failure of continentals, more than 70 years passed before the federal government would issue paper money again. However, until then, state- chartered banks made up for the lack of a national currency by issuing their own paper notes, which were obligations of individual banks. These state-bank notes became the dominant form of currency used between the American Revolution and the Civil War. Each bank designed its own notes, so they differed in size, color, and appearance. By 1860, an estimated 8,000 different state-banks were circulating what were sometimes called "wildcat" or "broken" bank notes in denominations from $1 to $13. The nickname wildcat came about because some of the less reputable banks were located in low-population areas and were said to attract more wildcats than customers. People also called the notes broken bank notes because of the frequency with which some of the banks failed, or went broke. Because these notes had varying degrees of acceptability and were not always redeemable in gold or silver on demand, they often circulated at substantial discounts from face value. These conditions made counterfeiting relatively easy and bogus notes abounded. In 1861, in an effort to finance the Civil War, the federal government issued the first paper money since continentals. The demand notes of 1861 were popularly called "greenbacks" because of the color on their reverse side. In 1862, Congress issued $150 million of legal tender notes, more commonly known as United States notes, and retired the greenbacks. These new notes were the first that were made legal tender for all debts, except import duties and interest on the public debt. Confidence in U.S. notes began to decline when the Treasury stopped redeeming them in coins during the Civil War to save gold and silver. However, redemption resumed in 1879. Even though U.S. notes were generally accepted, most paper currency circulating between the Civil War and the First World War consisted of national bank notes. This currency, uniform in size and general appearance, was issued by thousands of banks across the country. The federal government granted charters to these banks under the National Bank Acts of 1863 and 1864, allowing the banks to issue notes using U.S. government securities as backing. From 1863 to 1877, the notes were printed privately, but in 1877, the Bureau of Engraving and Printing -- a division of the U.S. Department of the Treasury -- assumed responsibility for printing all notes. During the late 19th century, the U.S. government increased its reserve of precious metals by offering certificates in exchange for deposits of gold and silver. In the late 1950s, rising world demand for silver as an industrial metal began pushing up its price. To avoid the possibility that the value of silver in coins might exceed the face value, the Treasury began selling silver from its stockpile in the open market to keep the price of silver low. However, demand continued to be high and soon threatened the Treasury's silver inventory, so Congress took steps to reduce the amount of silver in American coins. In 1964, the silver content of half dollars was reduced from 90 percent to 40 percent and, in 1970, was eliminated entirely. Silver also was eliminated from quarters and dimes in 1965. The elimination of silver from all U.S. coins completed the transition of American currency from money of intrinsic value to fiat money, the value of which lies in its wide acceptability and purchasing power. In 1971 the United States made a decision that marked the beginning of the end of the international system of fixed exchange rates. America closed its "gold window". Foreign central banks were thus prevented from converting their holdings of dollars into gold at the official price. For the first time in history, the world's principal currencies were shorn of all fixed links to the value of any real commodity. Henceforth the value of money - that is, the stability of prices - was entirely at the discretion of market forces responding to the intentions and policies of governments. Before long, inflation was raging almost everywhere. Governments throughout history have tampered with the link between currencies and underlying measures of value. Whenever wars or other emergencies required it, they have become monetary cheats -- fiddling with the convertibility of their currencies and at times suspending it altogether, raising revenue either by depreciating their coins (explicitly reducing their weight) or debasing them (secretly reducing the proportion of precious metal). Since ancient times, whenever private mints found that the fees (or seignorage) for weighing, certifying and coining their customers' precious metal was earning them a nice profit, governments began to monopolize the business for themselves. That way, they found, the currency could be more conveniently debased whenever their battles for territory demanded extra money. This technology of expropriation (monetary policy, as it is now known) took its greatest leap forward with the advent of fiat currency. Governments printed intrinsically worthless bits of paper, called them legal tender, and required their subjects on pain of imprisonment to give them goods and labor in exchange. For governments, the idea was understandably attractive. They surrounded the process with the mystique of sovereignty to make the confidence trick more plausible. In many countries counterfeiting was not merely fraud but treason. Similarly, in the present debate over European monetary union, it is said that the creation of a European central bank would be an attack on the sovereignty of the member states. Viewed in a historical perspective, that warrants a hollow laugh: the sovereignty in question is the right of a government to steal from its citizens. The only check on these otherwise excellent opportunities for theft was the promise to redeem paper money for an asset of intrinsic value, such as gold. For a long time that was a serious inconvenience to politicians, because until around the middle of this century people thought the promise ought to be kept. By 1971 it had already been badly undermined; the closing of the gold window finished the job. The power of the state took another large step forward for the time being. While fiat monies may be destined to collapse, this depreciation does not occur at the same rate. Some are better than others, and looking at the comparative strengths and values between currencies is important to preserving your wealth. To protect wealth properly, an investor must act on his own, know why he is doing so, and not drift along waiting for a political solution that history has shown is unlikely. Unfortunately, the current perverse welfare state policies of the U.S. government are unlikely to be changed until they produce a economic crisis. Loss of purchasing power -- history of debt in America is unique in the world, and dangerous to investors who stay only in dollars The United States has a history of debt that is unique. The psychology of this debt is important to the modern investor. Failing to understand it can be fatal, as happened during the 1980s "junk bond" fad, when the American investment markets appeared to lose all perspective on the matter of debt. This and the savings and loan industry crisis/collapse, were symptoms of an uncritical psychology that views any level of debt as benign or acceptable. For any investor this is dangerous thinking. Many of the original settlers before the American Revolution had financed their purchases of tools and land by debt. For a poor man to acquire debt in Europe was difficult, usually impossible; no one would lend him money as he had no collateral. In America it was easy, because the poor man had the security of his labor and, above all, a limitless future. Land purchase by debt, and speculation on credit, were thus written into the economic soul of the new nation. This was understandable, given America's special circumstances. And given the conditions of early settlement was fully justified. The early debt was, in most cases, paid. But acquiring debt, borrowing against the future, became a national characteristic: indebtedness was not only not shameful -- it was almost patriotic. Once independence was gained, financial institutions, above all, a plethora of banks, came into being to serve Americans who remained quite optimistic about their ability to service their debt. The government aided and abetted the process. As early as 1800, for instance, the government sold the public 320-acre farms but required only a quarter of the purchase price down. The rest was paid out of harvest profits over four years. Much of early land legislation during the next century provided for credit. Congress also encouraged business debt by, for instance, providing land free to railroads that could borrow enough money from the banks to lay down track. America's 19th century pursuit of her "manifest destiny," both in land settlement and in the communications revolution that made it possible, was essentially launched on credit. Pursuing the ideal of independence in the 1770s, the Founding Fathers not only created the national debt but led the new nation into the worst inflation of its history. By 1780 the $240 million of paper "Continentals" it had issued were almost worthless. In 1791 the national debt stood at 40% of Gross National Product. In 1835, President Jackson had reduced the debt to virtually zero. This satisfactory state of affairs has never been achieved since. Thereafter, the debt rose in accordance with "national emergencies." By the end of the Civil War it had risen to over $2.76 billion. By the end of the First World War it had risen to $25 billion, and was then prudently reduced by about a third during the prosperous 1920s. As a result of the Great Depression, however, it rose once more, standing at $48 billion in 1939. With the Second World War the national debt rose still further, this time astronomically, to $271 billion by 1946. But again the dictates of prudence began to operate. Between 1946, its high point, and 1975, the national debt was reduced by more than half. But then, in the late 1970s, a curious thing happened. Without an emergency, without a world war, without even the excuse of a severe recession, the national debt began to rise again, first slowly, then more rapidly. Since then it has reached a historic high. That meant a growing proportion of government revenues were devoted, year by year, simply to servicing the debt, and in turn (since its expenditures were not substantially reduced) that meant added pressure either to raise taxes or to expand the deficit and so increase the debt still further. High-spending congressmen, pursuing aims that by their nature are ultimately unrealizable, have proved popular with voters locally. At the same time, the electorate as a whole, voting nationally, expressed its concern at the country's drift into financial profligacy by sending to the White House Republican candidates pledged to do something about it. In practice, this led to an impasse: Democratic congresses, unwilling to cut domestic spending, and Republican administrations, unwilling to raise taxes. Thus the federal government came under the conflicting control of both parties, both blaming the other for what is, at bottom, a profoundly immoral procedure -- spending money by borrowing against the future. The result is the deficit and the mounting debt. Now this public debt comes on top of a huge volume of private debt, which itself is increasing. The United States was created by the judicious use of private credit. But this was balanced by a strict regimen of public probity, and the highest personal savings rate in the world -- at least until the 1930s. With the election of Bill Clinton, the United States is moving ever more rapidly away from the traditional American doctrine of individual financial responsibility. A consensus has emerged that it is now government's job to provide health care for everyone, food for those who don't work, and secure retirements for those who do not save. An enormous burden is being shifted onto the shoulders of future generations. So the wrong is not righted. The folly continues. The government is promising to do more for everyone when it cannot even afford the activities it is undertaking now. If the deficit continues to grow only at the rate it has over the preceding twelve years, interests costs will eventually absorb so much of the budget it will be increasingly difficult, if not impossible, for the government to perform even its most basic functions. And it looks like the growth rate of the debt will actually be much higher rather than the rate of the preceding twelve years. Foreign lenders might be able to help, but if their debts continue to rise, foreigners are going to become more reluctant to hold dollars, and the status of the dollar as an international currency could go the way of the British pound sterling, once a major reserve currency which has lost 97% of its value in this century. The United States could suddenly find itself a second-class citizen in the world economy, subject to the same strictures as Brazil, Russia, or other countries that have allowed their currencies to become unacceptable in world trade. A generation of economists, Washington policy experts, and publicists have argued that deficits are either desirable or don't matter. Those arguments have often carried the day because opposing arguments were not heard or were given the short shrift by selfish groups hoping to get something for nothing from an empty Treasury. As long as the dollar is the accepted international currency, America's foreign debt has not posed a serious problem. In fact, because the debt is in dollars, when the dollar declines internationally, the U.S. debt itself declines. But by continuing to run budget and trade deficits and to rely on foreign capital to buy U.S. Treasury bonds and stimulate private investment, the politicians could eventually incite a revolt against the dollar. Paying debts in a country's own currency is such a tempting privilege that it always ends up being abused. The issuer of a widely accepted money starts to consume more than it produces, and eventually the holders of its IOUs begin asking for a different kind of payment. This will eventually occur if the United States continues along its present deficit path. We could be only a crisis away from the death of the dollar as the world's reserve currency. For a long term investor or one building a retirement fund, betting your whole future on the dollar could be a very risky proposition. There are many political arguments as to what to do about the mounting national debt. These arguments could drag on without decisive action for years. If you enjoy political debate, you can and should go join them. But if you are also concerned with protecting your wealth and those who matter, you must rely on personal initiative, not a political solution to rescue your future. Furthermore, if you really want to participate in active politics, isn't it better to do so from a secure and protected position? The only real defense against this loss of purchasing power is international diversification of your personal investment portfolio. No other weapon can defend against the history of debt in America and its consequences. Why invest abroad? Global diversification increases your profits for less risk Why invest abroad? Isn't the United States still the most stable, free, and prosperous nation on earth? What safer haven could I possibly find for my assets? And if I could, what about convenience? Where else could I find such a diverse range of investment opportunity. Why would I need to own any currency besides the dollar? You may feel uneasy about putting some of your money in a foreign country. Other things being equal between nations, there really would be no reason to diversify your investments internationally. After all, you know your own country much better than any other country. You know your laws, your customs and the people you habitually deal with, while foreign customs seem to be strange indeed. If you keep your assets in your own country, it is much easier to keep an eye on them and to get to them rapidly when they are needed. But all things are not equal between nations. Some currencies are traditionally stronger and more inflation-free than others. Interest rates vary, as do foreign exchange regulations, banking laws, securities regulations, and political and economic freedom. Therefore, geographical diversification has become necessary for a prudent investor of any nationality. Over the past 20 years, capital markets outside the U.S. have grown rapidly in size and importance. In 1970, non-U.S. stocks accounted for 32% of the world's $935 billion in total stock market capitalization. By 1992, non-U.S. stocks represented 57% of total world stock market capitalization of $9,320 billion. For 1993, the world's top-performing stock markets were not those of the United States, Japan, or Germany. They were Turkey's (up 111% in U.S. dollar terms), Brazil's (up 83%), and Indonesia's (up 29%). Markets in Hong Kong, Singapore, and the Philippines have also delivered high-return performances in US dollar terms recently. U.S. issues represent little more than one-third of the world's total market in stock issues, and that share is dwindling. Growth always moves to areas of high opportunity and low costs. That is why growth surged, first in Japan; now it is Taiwan, Thailand, Singapore, South Korea; in the future it will be in Vietnam, even Cambodia. And Latin America. Chile has been growing at 8% per year, four times faster than the U.S. Mutual funds offer an easy way for investors to get involved in the stocks of foreign companies. So- called international funds invest solely in foreign companies; global funds mix in U.S. stocks. And increasingly, the funds are focusing on specific countries or regions, such as Southeast Asia. Investors can also buy pieces of the foreign companies directly, through American Depository Receipts, which are traded on U.S. stock exchanges. ADRs, which represent shares of a foreign stock, are issued by U.S. banks that take possession of the securities. The banks convert dividend payments into dollars for ADR holders and deduct foreign withholding taxes. ADRs give international investors a little more guarantee, because those companies have to meet certain accounting standards. For example, German companies that made only limited disclosures have to provide more information when moving into the U.S. markets. International diversification provides more investment choices, and more potential profits, than investing solely in the United States. If you invest exclusively in the U.S. market, you miss the opportunity to share in the potential growth of some of the leading companies in the world. Scan the list of products below, and you'll see many manufactured by non-U.S. companies that are "household names" in America. Aquafresh Beecham Baskin Robbins Allied Lyons Burger King Grand Metropolitan Carnation Nestle Close-Up Unilever Dannon Yogurt BSN Dewars Guinness French's Mustard Reckitt & Colman Frigidaire Electrolux Glidden Paint Imperial Chemical Holiday Inn Bass Lean Cuisine Nestle Dunkin' Donuts Allied Lyons Lucky Strike BAT Mighty Dog Nestle Panasonic Matsushita Pillsbury Grand Metropolitan Purina Dog Chow British Pete Q-Tips Unilever Ragu Unilever Sudafed Wellcome Sunkist Cadbury Schweppes Tetley Tea Allied Lyons Travelodge Trusthouse Forte T.V. Guide Newscorp Valium Hoffmann-La Roche As you are probably well aware, a diversified portfolio gives you the opportunity to enhance your overall return while reducing risk. So it's only logical that going beyond your border to invest would produce the same results. Trends in foreign stock markets generally do not always correlate highly with bull or bear market cycles in the U.S. stock market. While one or more foreign stock markets may at any time be moving in the same direction as its U.S. counterpart, longer-term correlations are low. This means that diversifying beyond a single market, such as the U.S., should reduce the overall volatility of your stock portfolio over time. In addition equity markets in one or more foreign countries almost always outperform U.S. stocks each year. Some American investors dismiss investments in overseas companies as risky, but they are living in yesterday's world. Many overseas investments are more conservative than their U.S. counterparts. For example, Swiss drug stocks typically have a price-to-earnings ratio less than half that of U.S. companies. (Dividing a share's price by the company's earnings per share is a basic way to compare stock prices.) Think of brand names known worldwide for investment potential. Companies such as Coca-Cola, Boeing, Disney, Ford, Citicorp, and Philip Morris are so multinational that they are not dependent on the U.S. economy, which is one of the things an investor would like to achieve. International stock markets have historically outperformed the U.S. market over the long run and have the potential to do so in the 1990s. In the 10 years ending in 1992, the U.S. stock market provided an annualized total return of 16% -- one of the best performances of any 10-year period in its history -- but 12 other equity markets around the world performed even better when measured in U.S. dollars. Annualized Total Returns 1982-1992 Hong Kong 25.5% Belgium 25.4% France 23.1% The Netherlands 22.1% Spain 20.9% Austria 20.3% United Kingdom 17.9% Sweden 17.6% Switzerland 17.0% Norway 16.5% Germany 16.4% Japan 16.4% United States 16.0% Australia 15.3% Denmark 14.4% Italy 14.3% Singapore/Malaysia 9.5% Canada 8.9% Many feel that U.S. stock markets are currently overvalued. Even though stocks have soared overseas, many are still undervalued. The price/earnings ratios of many foreign stocks are still extremely low compared to the ratios common in U.S. markets. Taken as a group, foreign stocks will generate higher returns than U.S. stocks in some years, but not in others. The important point is that U.S. and foreign markets do not often mirror each other. Therefore, combining U.S. with foreign stocks cushions the investor's overall stock portfolio against the full impact of potential down markets in one country or another. The rapid growth of capital markets around the world has created abundant opportunities for fixed-income investors. Worldwide bond market capitalization today is greater than worldwide equity capitalization. And non- U.S. bonds now account for more than half of the value of the world's bond markets. A global debt portfolio allows you to pursue attractive returns in a variety of markets. Over the past eight years, many foreign government bond markets have generated higher returns than the U.S. government bond market. Of course, there are special risks associated with global/international investing, including currency risks. We'll discuss this in more detail later. The world's top-performing bond market has historically varied from year to year. In the years from 1977 through 1993, the U.S. was the top-performing market only in 1981, 1982, and 1984. Global diversification makes just as much sense for bonds as it does for equities because economies and bond markets tend to move independently from country to country, and bond prices and yields in overseas debt markets show a low degree of correlation with the U.S. market. As a result, diversifying internationally among fixed-income markets may help reduce overall volatility. U.S. interest rates have declined dramatically over the past three years, which means many foreign bonds now provide higher yields than U.S. bonds. Furthermore, many non-U.S. markets offer the potential for higher prices if interest rates fall in those countries. Of course, interest rates are in a constant state of flux, and there are no assurances that foreign bond yields will remain higher than U.S. bond yields. In many European countries, they have already gone down a great deal. Some still have far to go. Diversification abroad provides protection against government intrusion into the economy Today the U.S. economic outlook is bleak. The cyclical disinflation of recent years should not obscure the possibility of resurgent inflation. This could be the terrible consequence of the staggering budget deficits and the monetization of this debt through expansionist Federal Reserve policies. This history of currencies section has already shown you the historical inevitability of collapse of all currencies. International diversification protects one from being solely committed to one currency. To all of this, politicians of whatever party or ideological perspective will respond in the same predictable manner. First, they will enact exchange controls to prevent assets from moving to a safer, more inflation-proof country or currency. Then, with private wealth frozen within the country, they will embark on an orgy of taxation and confiscation measures against the hostage assets in a vain effort to bail out the bankrupt federal budget process. This describes precisely the sequence of events during the last great U.S. inflation and in virtually every nation of the world which has ever suffered a hyperinflation. To assume that it cannot or will not happen again is to ignore all the evidence of history. What then can we do about it? It is important to be a good citizen, but it is equally important to be practical when planning for your family's future. Unfortunately, it is not likely that politicians will cut back on ruinous welfare state policies until forced to do so by an economic crisis. In a choice between imposing predatory taxes on you and losing votes from the growing dependent population, what do you think the politicians will do? Probably not the responsible thing. More likely than not, they will raise taxes and debauch the dollar. That will be the easy way out for the politicians. There is only one practical solution open to independent investors: get a portion of your wealth safely diversified abroad, while you can. Exchange controls could hit without warning When exchange controls take effect in any country, there is typically little or no warning. Most people don't realize that the U.S. already has legislation on the books, authorizing exchange controls, ready for implementation by the president by executive order at any time. The International Emergency Economic Powers Act (Title II of Public Law 95-223) is a little-known act passed without fanfare during the week between Christmas and New Year's, 1977. It gives the president complete power to "prohibit any transactions in foreign exchange," including "the importing or exporting of currency and securities" (Section 203a), in order "to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States." (Sec. 202a). This act thus could prohibit all exchanges of currency, even wire transfers to other countries. It has already been used by every President since it passed. Carter used it against Iran, Reagan against Russia, and Bush against Iraq. But it could easily be used against any and all countries. The growth of American investor's Interest in global and international mutual funds is popularizing foreign investments in ways that may invoke such controls. And these U.S.-based mutual funds are the very ones that are most vulnerable to controls, since they hold the money for tens of thousands of individual investors. In the right circumstances, it would not even be that difficult to order these funds to liquidate and repatriate foreign holdings -- an edict that would be difficult or impossible to enforce against individual investors with direct foreign investments offshore. Another forgotten law on the books is the Interest Equalization Tax Act. There is no reason for it to have been forgotten, but most investors (and many Americans seem to have short memories.) It is only 20 years since gold was legal for Americans to own, and the same length of time since the Interest Equalization Tax was lowered to zero. And that is the key -- it was lowered to a temporary zero rate, not abolished or repealed. First enacted in 1964, it put a 15% tax on all purchases of foreign securities. It could be raised again at any time, and this time it would also affect all purchases of U.S. mutual funds investing internationally. These did not exist in 1964, but they do now -- they are very vulnerable. Such a tax would not affect their existing holdings, but what happens to a fund that can only hold its existing securities, and cannot replace them with other foreign securities? The whole management aspect of the fund is destroyed. The inability to manage would be likely to cause a run on all of these funds, with forced liquidations to meet redemptions causing distress sales of portfolio holdings -- and/or a suspension of redemptions. Within Western Europe, exchange controls have been lifted completely in most countries. All European Union (EU) members are required to permit free movement of funds within the EU. Some of the countries outside the EU still maintain some form of control, particularly Austria, Sweden and Norway. Exchange controls also exist in most of the developing world and in the former East Bloc-that-was, where there are plans to lift them over time. It would be ironic if the United States were to impose hindrances on the free flow of money just as other countries are coming around to a liberal position. Some of the recent measures taken by American authorities in the supposed crackdown on insider trading and drug dealing come perilously close to introducing exchange controls on Americans. Confidence in American financial institutions continues to erode. A 1989 study by American Banker revealed that more than 30% of respondents said they had less faith in the system than in previous years. Could the U.S. financial crisis of the l990s result in the same kind of deflationary collapse that brought on the Great Depression of the 1930s? The answer is a clear yes -- especially if the Federal Reserve miscalculates on the scale that it did 60 years ago. It has been hard enough to convince individuals to look outside the conventional investment media of stocks, bonds, and life insurance for financial safety, but the idea that it might also be necessary for them to look outside the borders of the U.S. for capital protection is more than many Americans can comprehend. Of course, many Americans who came of age before and during the Cold War are reluctant to think of investing abroad. This is a natural consequence of the fact that the U.S. was the world's economic leader during the third quarter of this century -- as a sprawling continental economy. Because the U.S. was so vast and so rich Americans were not obliged to turn abroad in search of investment opportunity as investors from Britain and the other European empires had been obliged to do. The U.S. dollar was the strongest currency in the world during most of this century. America had a long history of protecting the property of individual citizens. The revolutions and wars that laid waste to other nations, and destroyed the savings and investments of their citizens barely touched American shores. And most important of all, for the first 150 years of American history, the individual was able to keep the major part of whatever he earned, either from his business or from his investments, without fear that the state would confiscate his gains. In total freedom, he could move his capital in and out of the country, without the permission of government. In other words, the American investor kept his investment in his own country because of both the opportunities and the safety. Today, growing numbers of investors are convinced that the U.S. is no longer the land of safety or opportunity that it was. A few of the more astute investors are overcoming their resistance to the idea of having their wealth kept thousands of miles away, across oceans and borders. There is a growing flight of U.S. capital abroad. But still, up until now, only the most adventurous of U.S. investors has actually taken the time and effort to look into the opportunities abroad. The great majority remain ignorant of both the reasons for taking their capital out of the country and the mechanisms by which to do it. There are many countries today that fight their own domestic economic problems by holding their citizens' wealth hostage. The battle by citizens to overcome these restrictions is documented by occasional news stories of important people being caught in the act of "smuggling" their own money across borders to safer havens. But just as citizens export their wealth to avoid its confiscation, so governments work diligently to close the escape routes. Foreign exchange controls, currency controls, credit controls, and taxes on foreign holdings are devices created by the politicians to either freeze wealth within their jurisdiction (so they can take it when they want it), or to discourage people from diversifying abroad. As the flight of capital continues the tendency is for the laws to be tightened and the severity of the penalties for capital export to be increased. The propaganda machine of government is turned on fully against the "rich" speculators who are escaping with assets that "should rightly belong to the nation." Whatever happens, you want to be prepared in advance, and global investing is a superb hedge against any contingency. The knowledge that a portion of your wealth is waiting for you, where nobody can touch it but you, creates a sense of security, and a freedom from fear. That's something you can't put a price tag on. But if you are a person of substantial wealth, it has become necessary, perhaps even crucial, to have some of your assets in another jurisdiction to hedge against adverse political developments in your own nation. That way, you can watch events at home unfold with the security that at least some of your property is outside the easy reach of greedy politicians. In 1928, U.S. Supreme Court Justice Louis Brandeis wrote that "the right to be let alone is the most comprehensive of rights and the right most valued by civilized men" (Olmstead vs. U.S.). The irony of that statement is that Justice Brandeis was writing a minority opinion in the case, and his opinion has been in the minority, among bureaucrats and politicians, ever since 1928. In the Olmstead case, the 5-to-4 majority gave the FBI permission to wire-tap suspected gangsters, and such wire-tapping is now widely considered to be a legitimate activity of government agencies. By 1971, with the passage of the misnamed "Bank Secrecy Act" in the U.S., government access to private banking transactions became almost total. This law commands banks, among other things, to microfilm all checks over $100. The Bank Secrecy Act actually wipes away any pretense of privacy in banking transactions. The U.S. government has virtually deputized the banker to enforce federal policies instead of the customer's wishes. The government does everything it can to control your financial life given the limits of technology. Notice how often you are asked for your Social Security number, even for non-financial applications. When you apply for any kind of loan or credit application, notice the breadth and depth of information which goes on your record -- some of it having nothing to do with finances. On your federal 1040 form each April, notice the information being requested in detail. A complex return may include many pages of special schedules, listings of all companies paying you dividends, all banks paying you interest, etc. It seems the government doesn't just want our money. They want to know every detail about your life. This financial information is kept in public and private files all over the nation. The IRS computer has every detail of your tax forms over the years. The private credit files contain all the information you put on loan or insurance applications (health history, etc.). All your former employers have files on you. You would be amazed at the paper trail you have created by a lifetime of filling out forms. Back in 1928, when Justice Brandeis eloquently expressed what the majority of Americans (if not justices) believed, there was a great heritage of privacy and independence in America. The 19th Century was the Era of Rugged Individualism. People did not share personal or financial information with their neighbors, or even their children. At the time, "Silent Cal" Coolidge was President and he exemplified the closed-mouth Yankee virtue of silence when he said, "I've never been hurt by anything I didn't say." And that says a lot. Today, it is not uncommon to hear light cocktail banter about how much an investor has in T-bills, Swiss francs, bonds, etc., or to brag about one's "secret Swiss bank account" to a near-stranger, who just might be an undercover federal agent or informer! We often hear people divulge their salary and outside income to anyone who asks, or broadcast the value of their real estate, cars, or other possessions. The virtue of holding financial information in confidence has apparently been eroded badly since the days of "Silent Cal." In his novel, Cancer Ward, Alexander Solzhenitsyn presents an interesting imagery about what government reporting looks (and feels) like: "As every man goes through life," he writes, " he fills in a number of forms for the record, each containing a number of questions. There are thus hundreds of little threads radiating from every man, millions of threads in all, and if these threads were to suddenly become visible, the whole sky would look like a spider's web. They are not visible, they are not material, but every man is constantly aware of their existence." It is possible to begin cutting away some of those threads, or at the very least to limit the number of new informational threads being attached to us. We can all begin giving out less information about ourselves. It's possible to conduct financial matters without using checking accounts, which are microfilmed, or credit cards. You can use cashier's checks, traveler's checks, money orders, or cash. There are many ways to keep your financial affairs more private, including having an offshore bank account and trust. If you compare the practices of your U.S. bankers to the practices of offshore bankers, it will become obvious to you that foreign bankers respect your money and your privacy, while U.S. bankers usually do not. This is one of the reasons that U.S. banks have attracted only a small share of business from savvy foreign investors. None of the top 25 banks in the world is now a U.S. institution. America's economy will get worse before it gets better. Today there is a large and violent dependent population who demand that politicians protect them from falling living standards. But governments cannot deliver on this expectation. They are more bankrupt than ever before, and likely to become more so. The impact of information technology will result in tens of millions of low-skilled service workers being made redundant in the next few years. This will lead to a further shortfall in tax revenues, and more demands upon politicians to redistribute income from an empty pocket. A crisis looms ahead. Desperate for money, politicians will raise taxes, impose exchange controls and institute other policies designed to confiscate wealth wherever they find it. No doubt, they will attempt to dilute the value of your capital through inflation. And as investors turn to gold as a protection against inflation, you can expect history to repeat itself. The authorities in the United States confiscated private gold holdings in the depression of the 1930s. They may seek to do so again in the depression of the 1990s. Now, with the Clinton administration, we have both a president and a Congress who firmly believe in the redistribution of wealth as a social goal. It is important to keep in mind that these goals and attitudes are going to be with us throughout the Clinton administration -- it is not enough just to focus on whatever proposals might currently be pending. Already, in the debates on the various estate tax proposals, members of Congress are being heard to say things like "people shouldn't be allowed to take it with them -- it must be distributed to society." To quote Harry Browne, the famous author of numerous books on investing: "Never keep all your wealth in the country where you live. Keep part of your assets hidden and beyond the government's reach." Only then, he writes, will you "know you own something, somewhere, that the government isn't going to get its hands on." We can't pretend to know exactly what nasty surprises the government has in store for us next, but Doug Casey, noted contrarian and editor of Crisis Investing, put it very well when he said that "one of the fixed points in the cosmos is the stupidity and malevolence of government." Most nations of the world eagerly welcome foreign capital, offering tax advantages and favorable interest and exchange rates to woo investors' capital from other nations to their own. Sending a portion of your capital outside your own nation requires that you sharpen your awareness of a whole new set of economic and political indicators. Each nation has different regulations, taxes and exchange restrictions, not to mention the limitations on personal freedoms of speech, assembly, religion and petition of grievances. It makes sense to compare nations as carefully as you compare brokers, bankers, bond ratings or any other investment you make. Investing abroad protects against government intrusions into private financial matters Officials of the U.S. Drug Enforcement Agency are trying to get bank authorities in other countries to cooperate in a new scheme to collect information on senders and recipients of bank transfers. The idea is to prevent money laundering, which is the movement of the proceeds of crime into legitimate banking circuits through a foreign account that cannot be tracked. When profits from the drug trade are used to buy more drugs, there is no need to involve legitimate banking circuits or make wire transfers; cash is an acceptable mode of payment. It is also the way drug lords acquire cars, yachts, gold chains, art, and even real estate. When the criminals have made so much money that they can no longer spend it or reinvest it in the drug business, however, they want to be able to buy stocks and bonds, life insurance, and legitimate businesses. For this they need bank accounts, checks, and bank drafts. You cannot deposit large amounts of cash into a U.S. bank without a record's being kept, so drug dealers are inclined to use foreign banks. The Drug Enforcement Agency seems to think that wire transfers are also being used by drug dealers. Therefore, the DEA is trying to monitor all such transfers. The fight against drug dealing seems to entail trying to collect all information about movements of funds between the United States and accounts abroad. Of course, this information yields more than just what American criminals are up to, and therein lies the problem for the honest investor. Data on wire transfers could determine which Americans hold overseas accounts to check on whether they are reporting their existence (as is required by law if $10,000 or more is held abroad). This same information could be used to check up on American holdings abroad to enforce tax laws, inheritance laws, bankruptcy rulings, or the results of malpractice suits. U.S. officials are focusing attention on private banking, which means large transactions on behalf of wealthy individuals internationally. The key to the U.S. effort to crack down on money laundering is the Anti-Drug-Abuse Act, which requires that the U.S. Treasury negotiate with other countries to establish financial-information exchange agreements and encourage them to adopt bank reporting rules for U.S. currency transactions or ones originating in the United States. If the Treasury reports that a country is not negotiating in good faith, the president is required to deny banks of that country access to the U.S. payments system. In addition, at the 1989 economic summit of the industrialized democracies, world leaders pledged cooperation to fight international movement of drug money. The Group of Seven (G7) countries (the United States, Britain, Japan, France, West Germany, Italy, and Canada) subsequently held meetings about how to proceed in this. Two G7 countries, Britain, Canada, are tightening their own laws on money laundering. In the Bank for International Settlements, which is the central bank for central banks, the U.S. Federal Reserve in January 1989 won agreement from the governors of central banks of the Group of 10 (G10) countries to make it harder for people to deposit cash in banks in their jurisdictions. This is called the Basel Statement. (The Group of 10 consists of the United States, Britain, Canada, Japan, France, West Germany, Italy, Sweden, Belgium, and the Netherlands. Switzerland, which used to be an observer, is now a full member, so the Group of 10 is made up of 11 countries.) The Basel Statement marks a major departure for G10 supervision, which hitherto involved international exchanges between supervisors rather than matters regarding details of individual depositors. Hitherto, the G10 had followed the so-called Cooke Principles (defined in 1983 by a committee headed by Peter Cooke, chief banking supervisor of the Bank of England), which specifically provided for recognition of banking secrecy. Now central banks will exchange information on individuals any central bank thinks are involved in money laundering. Bank secrecy does not apply in these cases. The Anti-Drug-Abuse Act was passed by a Congress facing election pressure to get tough on drug dealers. The law tightened currency-transaction reporting rules for financial institutions and gave the Treasury power to demand additional information in some cases. This may include reports on transactions smaller than $10,000 for any 60-day period, which can be indefinitely extended. The bank will have to provide the name, birthdate, and Social Security number of each customer. Subsequent laws have done things like require reporting of money orders over $3,000, and reporting of cash receipts by car dealers, boat dealers, and other businesses. Furthermore, the bank is not allowed to tell customers why this information is being requested. A new $15 million database center has been created by the U.S. Treasury to deal with the data. The Financial Crimes Enforcement Network (Fincen) will collect banking and personal data on cash movements among all financial institutions in the country and details of all wire transfers and all transactions involving sums in excess of $10,000. Furthermore, banks are required to report "suspicious activity" even if large currency transactions are not involved. For example, the banks must use their judgment in reporting large increases in activity or a host of foreign transfers right under the $10,000 limit. It is expected that the fine-tooth-comb reporting rules will target areas suspected of drug dealing, such as New York and Los Angeles, as well as areas where drug smuggling is felt to take place, such as Florida, Arizona, and Texas. Funds originating in target areas are more likely to be reported upon. In theory, the controls are on cash deposits. There is a likelihood that banks will also be forced to keep track of large cash withdrawals. These too are liable to be considered "suspicious." If you want to deal in cash, you should consider moving your account to an area not subject to this kind of scrutiny. Perhaps Ohio or North Carolina. Also, remember that very little record is kept of cash withdrawals made through automatic teller machines or by using credit cards. Thus far, most foreign bank authorities have resisted the effort to set up a generalized system for reporting transfers originating in the United States or deposits of cash above a certain size. What they are insisting on is a specific request from the U.S. authorities about funds originating in the account of someone who is under suspicion and proof that a court order has been issued in the United States to subpoena such information for good cause. In fact, some bank specialists think the new surveillance is not intended merely to track drug transactions. The Treasury is also the parent of the IRS and in charge of administering reporting requirements on overseas bank accounts held by Americans. So the motive may be to make money movements harder and more costly. It can be argued that such rules are intended to dissuade residents of the United States from moving their funds overseas even for legitimate purposes. Although the United States does not have exchange controls, it does have an increasingly onerous set of reporting rules. And lest we suffer from short memories, it is only recently that American laws were changed to permit investments in gold and foreign securities. During President Johnson's administration we even were threatened with "temporary emergency" exchange controls on foreign travel. The Securities and Exchange Commission The Securities and Exchange Commission (SEC) is not any more mindful of the borders of the United States than is the Treasury. Of course, it too likes to collect data, and that is the main focus of its extraterritorial push through the newly created Office of International Affairs. The SEC has agreements with Britain, Switzerland, Japan, three Canadian provinces, Brazil, the Netherlands, and France. These try to ensure the "transparency and security" of international markets. Transparency means that information should be available about companies and trading; security means that investors are protected against fraud, insider trading, and manipulation. In theory, this is a good idea. In practice, however, the Europeans are already having second thoughts. The Dutch have one of the oldest stock markets in the business, and they have a very long relationship with U.S. markets. The first American bonds issued outside the country were sold during the American Revolution to Dutch investors. Several Dutch companies, notably Philips (Norelco in the United States) and Shell, actually have their shares directly listed by the New York Stock Exchange. What is worrying to the Dutch is that the SEC is now demanding documentation and reporting from these companies that exceeds what the Dutch themselves require. (The Amsterdam "Beurs" is self-regulated, and there is no equivalent of the SEC at all.) It is thus far asking for this information politely. Enforcing U.S. court orders abroad The Europeans noticed that the SEC wants to have a U.S. court order work in another country. Some years ago, a grand jury in Miami ordered a Bahamian branch of the Bank of Nova Scotia to hand over bank statements of a defendant accused of evading payments to the IRS. It is against Bahamian criminal law for a bank to disclose information about a customer without his consent; in this case, the customer did not consent. Unfortunately, the Bank of Nova Scotia had a branch, assets, and staff in Miami, subject to sequestration and possible imprisonment. So the order was complied with after it had fought this outcome right up to the U.S. Supreme Court (in 1983). Compulsory waiver In the past decade, the courts allowed something called a "compulsory waiver." Because most foreign laws contain a provision on bank confidentiality, the SEC started using subpoenas to bring parties before a court. Then the court would order that they should consent to disclosure of their affairs. If consent was not given, they could be imprisoned indefinitely for contempt of court. This procedure was used regardless of the Fifth Amendment, which provides that no person shall be compelled to be a witness against himself. The U.S. Supreme Court in re Grand Jury Investigation (Doe v. US) "Doe II" ruled in favor of the SEC. In effect, the ruling concluded that no Fifth Amendment violation existed because producing bank records was not "evidentiary" -- meaning that the individual is not being asked to testify against himself in violation of the Fifth Amendment. "Consent" may not mean consent Consent given in response to the threat of indefinite imprisonment hardly sounds like consent, which is defined as "voluntary agreement" by most dictionaries. The issue came up again in SEC v. Wang and Lee at New York's Second Court of Appeals. The SEC was investigating alleged insider trading and trying to recover vast sums of illegal profits. The agency got New York District Court orders freezing Lee's assets on June 27, 1988, which purported to be effective worldwide. These orders prohibited any financial institution's holding the assets of Lee and/or 35 other named individuals (said to be his accomplices) from allowing these customers to withdraw or deal with the money said to have been gained through insider trading. The bank affected was Standard Chartered, which operates a branch in New York and which had deposits totaling $12.5 million from Lee and his various parties in Hong Kong. Ten days later, Lee's lawyers in the Crown Colony demanded payment of all money in the accounts in question. Disobeying the New York court order made the bank liable to sequestration of its assets there, imprisonment of its staff for contempt of court, and other harassment. Meanwhile, the Hong Kong courts ruled that they did not regard the U.S. court order as valid. A series of further orders were slapped on Standard Chartered to convert all of the deposits into U.S. dollars and pay the total to the New York court. Diplomatic protest The British government filed a diplomatic note of protest in Washington. The British Foreign Office, the Bank of England, and the British Department of Trade and Industry tried to protect the bank by filing amicus curiae briefs in the appeal. Other such briefs were filed by the New York Clearing House Association, the Institute of International Bankers, and the New York Foreign Bankers Association and were subscribed to by the British Bankers Association, the Canadian Bankers Association, the Committee of London & Scottish Bankers, the Hong Kong Association of Banks, and other bodies. The way the U.S. court had acted in issuing the orders, the British diplomats, government officers, and bank supervisors argued, was likely to lead to less respect for the law. The amicus brief said, "The nature of the concern is that conflicting orders of courts of different jurisdictions affecting the same parties and the same subject matter cannot both be obeyed, so that the law of the country, the order of whose court is not obeyed, must necessarily be weakened and brought into disrepute." The brief also noted that there was no way the bank could fulfill its duty to its client under Hong Kong law and also meet the New York court orders. "In the case of a bank it would often be the case that it would have branches in both of the jurisdictions in question, and so would be subject on the one hand to civil liability and on the other hand procedures for monetary penalty and imprisonment of its staff for disobeying the order of the court." Persecuting innocent bystanders The amicus brief also pointed out that the staff members of the bank, innocent of any wrongdoing, were subject to imprisonment and penalties, which is unfair. It also noted that international "comity," the rules of polite conduct between nations, was being violated by the New York court. "The difficulties of innocent third parties might be avoided and the comity of nations preserved if it was accepted that no such court would make orders with extraterritorial effect on parties against whom no substantive relief was sought, unless subject to the endorsement of the foreign court in question." The final result was a standoff. In the end, the SEC agreed to an out-of-court settlement with Lee et al. Lee "voluntarily" agreed to transfer the funds to New York. Standard Chartered won a moral victory, as its costs were provided for, and it avoided having to pay out the $12.5 million twice. But the District Court orders were not overruled, and no decision was made about their validity. Contempt for the law One result of the ham-fisted behavior of the courts, the SEC, the DEA, and the Treasury has been that other countries refuse to cooperate in cracking down on money laundering even when the indications of it are clearest. By taking a broad-brush approach, American regulators are clearly hoping to catch violators of U.S. tax and securities law who are not drug smugglers at all. By doing so, however, they are in fact making it easier for European banking centers, which want to ignore their efforts to do so. In the Swiss Federal Banking Commission investigation of the use of two Swiss banks by a pair of suspected Lebanese money launderers, the final report determined that no additional banking regulations were needed. The laundering operation, which ended in mid-1988, transformed a total of nearly $1 billion (SFrl.4 billion) delivered in cash (bank note) form to the banks in Switzerland. It was turned into deposits in 300 banks outside Switzerland and into precious metals investment. The Swiss simply decided to do nothing about their law (which one U.S. bank regulator called "as full of holes as their cheese") precisely because there was so much pressure from the United States to impose quantitative rules, which go against the Swiss grain. The Swiss, in common with other banking centers dedicated to secrecy, will reveal client-account information if criminal charges have been brought. They are not prepared, however, to operate a reporting system based on amounts (i.e., telling an official about any transaction worth over $10,000) as in the United States. Italy, which has become a channel for "dirty money," is treading very cautiously. Although a Socialist politician, Rino Formica, has called for the lifting of Italian banking secrecy entirely, mainstream Italian officials point out that, in practice, Italian banks do not offer secrecy comparable to that offered over the border in Switzerland However, in parts of Italy, notably Sicily, cash is king, and one way to crack down on drug money may be to require that those dealing with their banks on a cash basis be identified. One proposal being considered by the Italian authorities is that in the future anyone undertaking a cash operation involving more than 10 million lire be required to identify himself. Ten million lire is $75,000, a rather considerable amount compared to the $10,000 used by American banking regulators. Thus far, the measure has not been enacted into law. Bluster and blunder by the DEA make it more remote. Here is what one European banker had to say in May 1990 about the Drug Enforcement Agency effort. The interviewer was John Doherty (who is managing editor of Private Banker-International, published in Dublin, Ireland). The place was Vienna, Austria, a country of banking secrecy. The speaker was Dr. Fritz Diwok of the Verband Oesterreichische Banken und Bankiers, a bankers' organization: "In common with other countries, we believe we cannot react when we receive a list of 1,000 Panamanian names, starting with the general and director of the airport, then their girlfriends, and then their relations, with no indication as to whether these people have committed a crime." Investing abroad is neither immoral nor unpatriotic Should you support the government's efforts to keep your money captive within borders on the basis that it is patriotic, good for the nation, ethical, or moral? No. In fact, you are doing your country a favor by helping to secure and enlarge your investment capital. No matter which country you call home, you are more likely to invest the ultimate proceeds of your estate to the benefit of your fellow countrymen. Therefore, the only real question is whether you have the capital to invest, or whether you allow that capital to be blocked and perhaps ultimately taken away by politicians. Only by placing your money in a sound offshore platform can you guarantee that compound interest will be allowed to work for the benefit of your country and not against it. A wealthy Englishman who is a client of Lord Rees-Mogg offers this compelling example of what is at stake. British tax law, which is far more enlightened than U.S. law, does not impose income tax on British citizens not normally resident in the United Kingdom. This enables British citizens to accumulate wealth more easily than Americans. What is the difference over a lifetime in having investments compound offshore free of tax rather than onshore, where the British government would take 40% of any profit? It is enormous. Taking the actual return achieved over the past decade on his portfolio -- an annual 20% gain -- about what George Soros has averaged since the 1960s -- Lord Rees-Mogg's friend found the startling result. The untaxed portfolio was 1200% larger than the taxed portfolio. It was the difference between having $8 million after 40 years and $100 million. When you think about that, it raises a frightening question of who will own the world's wealth in 30-40 years. The answer is that little of it will be owned by Americans. Because European, Latin American, and Asian investors, particularly the Chinese, overwhelming compound their profits in offshore centers where they are not taxed, most of the world's money will inevitably gravitate into their hands. Investors in low-tax or no-tax jurisdictions will control the wealth and make the investment decisions that will determine the economic destiny of the next century. If those investors are mostly European, Chinese, or Latin American, the only result to be expected is that Americans will be shut out of the economic future -- just as other people without capital are shut out today. If taking your money offshore allows you to achieve even a slightly higher rate of return -- thus allowing compound interest to work more for you than against you, you could be helping to secure a better future for future generations of your countrymen -- perhaps including your own children and grandchildren. The lower the after-tax return you realize on your investments today, the weaker America's competitive position tomorrow. Asset protection through the use of international financial strategies and diversification requires considerable initiative, alertness, determination, and dedication. Not that it doesn't pay. Sad to say, the net gain from each hour dedicated to protecting your wealth is almost certain to be higher than the net gain from an hour of productive employment. Thanks to "progressive" taxation, this goes double for someone in a high federal tax bracket, especially for residents of high tax states like New York and California. There is also a psychological dimension that must not be neglected. Most people derive a "clean" feeling from making a living through their work, but feel that there is something "dirty" about "scheming" to reduce their taxes. Heavy taxes, whether used to provide luxury for a ruling elite or to support welfare schemes, always have the effect of penalizing individual initiative and productivity, reducing investment capital and thus the resources required for economic growth, reducing the standard of living, and forcing individuals to hide things, both activities and incomes, from the government and from one another. Heavy taxation is, therefore, a danger to the future of the high-tax countries. Internationalizing assets assumes at the outset that the investor has assets that are available for investment. It also assumes that a viable means of doing so exists in the contemporary scheme of world business; and ideally, a plan exists that includes short- and long-range investment goals. The morality of taxation changes with the times. Prior to World War I, when taxes were comparatively low, though certainly not popular, most workers and small businessmen were exempt from the controversy by virtue of low incomes. During times of national emergency, particularly during and directly following World War II, tax avoidance was frowned upon even by those who were looking at larger tax liabilities each year. But as progressive tax rates brought taxes higher and higher each year in highly industrialized and populated nations, the attitudes of taxpayers underwent a gradual, but definitive change. Today, even the individual worker for whom the tax system is supposedly designed, can see that a tax system in which higher income brackets produce progressively higher tax rates is stultifying to individual initiative and productivity. Investors feel not only duty-bound but morally obligated to use the legal tax avoidance measures available to them. Whether the tax loss to the nation is through using domestic tax shelter strategies, or through the use of an international financial center, the avoidance principle is exactly the same. From a purely pragmatic viewpoint, legal tax avoidance by an investor may be simply a means of economic survival for himself and his family. The "losers" in this business of tax avoidance are presumed to be the heavily industrialized, heavily populated, and heavily taxed countries of the world. If two nations could personify this description, they would be the United States and Great Britain. Yet the attitudes of these governments toward tax avoidance is ambivalent to say the least. The United States, for example, actually established itself as a tax haven for foreigners by not imposing a withholding tax on interest paid to foreigners on their U.S. bank deposits, and allowing foreigners to buy, hold, and sell U.S. securities without incurring a capital gains liability. There are, of course, economic reasons to justify these tax rulings (a reversal of the ruling on interest paid on bank deposits would remove billions of dollars from U.S. banks.) This being the case, we can say that there is no external threat to tax avoidance from free world nations. The United States, the United Kingdom, and Switzerland are all involved in the business of providing a haven for foreign investors to protect their assets. The citizens of each frequently use the other for international diversification, and none is likely to try to put another out of business. The arguments that apply to taxation apply even more strongly to asset preservation through international diversification. Much of the growth in China today is being funded by Chinese investors in Hong Kong who got their capital out of China during the communist takeover, and are now providing the funds to restore capitalism to their country. Preservation of wealth often involves a timely decision to move capital from one place, or one form, to another. Many times capital would have been lost, if it had not been wisely redeployed as circumstances changed. Capital is always under political threat when it is in a minority. The periods of greatest risk are times of public disorder when many are impoverished, or losing income, and only a few are wise enough or lucky enough to preserve their wealth. In 1931, Britain went off the gold standard. At that time, investments in gold coins could be bought for 100 pounds which would now sell for 50,000 pounds, while government bonds could have been bought for 100 pounds which would now sell for 30 pounds. Yet in 1931, government bonds were thought a safer investment than gold coins, and were the only investments allowed for most trustees. This shows how families can very rapidly be reduced from prosperity to poverty. The difference between two investments in one lifetime could easily amount to one investment rising 12 times as fast as inflation while the other falls to no more than one percent of its original purchasing power. Take the experience of what happened in one generation in Britain as a likely model for what lies ahead for North America. A government wrestling with economic decline is almost driven by the logic of the political system to destroy capital. Allowing it to destroy yours is not a rational path to prosperity or security. To whatever extent the politicians succeed in overtaxing your wealth, they are likely to waste the money in counter- productive income redistribution. The more you feed the crocodile, the bigger it grows. The one clear answer is self-protection. But how? The rest of this book will show that there are ways -- perhaps none of them perfect -- but apparently just as legal and prudent as less imaginative ways of investing your capital. If you want to gain a good understanding of how the government views tax havens, University Microfilms International, through its Books On Demand program, is now making available Tax Havens and Their Uses by United States Taxpayers by Richard Gordon. Frequently referred to as "The Gordon Report," this was a 1981 U.S. Treasury Department study prepared at the request of Congress. It gives considerable detail and examples of the uses of tax havens. It is available from University Microfilms for $67.30 softbound, or $73.30 hardbound. Out of print for over a decade, anyone interested in tax havens who has not studied the work will find much still useful information in it. Copies can be ordered through booksellers, or directly from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Michigan 48106-1346; telephone 800- 521-0600 or 313-761-4700. The UMI catalog number of the book is AU00435, and UMI accepts Visa or MasterCard. Today, even the major firms that had no international involvement are heavily promoting international investments. Merrill Lynch has created a series of global and international funds, including the Merrill Lynch Developing Capital Markets Fund, Merrill Lynch Dragon Fund, Merrill Lynch EuroFund, Merrill Lynch Latin America Fund, Merrill Lynch Pacific Fund, Merrill Lynch Global Allocation Fund, Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill Lynch Global Convertible Fund, Merrill Lynch Global Utility Fund, Merrill Lynch International Holdings, Merrill Lynch Short-Term Global Income Fund, and the Merrill Lynch World Income Fund. And this long list of funds is now being mass marketed to Main Street America. Having some of your assets offshore -- in an offshore bank account, money management account, or revocable annuity -- will also provide a degree of protection against creditors and lawsuits. By the time a claimant receives the proper authority to access your assets, in many offshore jurisdictions you could have the account moved to another jurisdiction. The claimant may give up on those assets rather than continue to chase them. Some types of foreign assets -- particularly some annuities -- cannot be seized by creditors at all. Asset protection is a hot topic these days, nearly a fad. Which means that you need to be extremely careful -- the waters are full of sharks. There are things that you can do to protect yourself, but you don't necessarily need a shark with "attorney at law" after his name to charge you from $10,000 to $75,000 to do it. But if you assets are large enough, that price might be cheap. Seminars on asset protection are being held across the country, usually to try to sell the wealthy on the need for immediate (and expensive) protection. Many of the techniques are valid -- many are not -- and they can work just as effectively for the non-millionaire with assets to protect. Because America's civil law has become a lottery in which vast judgments can be lodged against anyone for unpredictable reasons. Simply having visible wealth in America is an invitation to trouble. Consider: * Inadequate insurance A doctor works all his life to provide competent and effective care for his patients. A surgery leaves a patient crippled. No surgeon is 100% successful, but the jury in the malpractice suit awards the plaintiff $15,000,000, an amount greater than the policy limits. Or worse, the insurance company fails and there is no protection. * Partnerships A law firm is having its monthly partners meeting. They send out for lunch. Most want pizza but one wants a pastrami sandwich. Their secretary decides to go pick it up. Unknown to the twelve partners this person has a horrible driving record. On the way back the secretary runs into a group of pedestrians. The police arrive. The secretary eats the pastrami and the partners are sued. A judge decides that they are liable as the secretary was performing an act for the partners in her ordinary course of employment. The jury, sympathetic to the victims and enraged by the driving record awards $3,000,000 in damages. As partners all of the lawyers are jointly and severally liable. In effect, the jury has awarded the plaintiffs three condos, two sail boats, three houses, nine cars, and twelve installment notes. * Directorships It used to be an honor to be a director of a bank, savings and loan or prominent business concern. Today there are over 2,243 directors of banks and savings institutions being sued. One hospital failed and the IRS sued its community advisory board for unpaid back taxes. * Simple Ownership A land speculator bought a parcel for subdivision, held it for one week and sold it to a developer. Later, after houses were built, a homeowner who was an environmental engineer noticed an old buried drum. It contained a deadly toxin. The Environmental Protection Agency held the site to be a "superfund" site. The largest law firm in the world, Uncle Sam, began an action against the landowners. The suit brought in the land speculator. Although the total invested was only $100,000, the inferred liability exceeded $30,000,000. Under the law this can never be discharged. The corporate builder and corporate developer collapsed leaving the individual land speculator to carry forever his modern scarlet letter. * Joint Ownership Mom with the best of intention deeded her house to joint ownership with her son. She intended to avoid probate, taxes, etc. Unfortunately, a tax shelter that he participated in resulted in an unfunded tax liability of $75,000. The son was a little down on his luck at the time of the tax levy. IRS can seize and sell the house according to the United States Supreme Court. * Inferred Liability A woman answers a knock at the door and lets the IRS agent into her house. the IRS agent gives her a bill for over $100,000 of back taxes, penalties, and interest with her ex-husband's name. Apparently he was a little creative with his filings, while she simply signed their joint return. * Inadequate Corporation Almost everyone knows that you may use a corporation to shield liability from its shareholders. Unfortunately most people fail to follow all the rules about keeping the corporate papers and procedures up to standard. A good attorney has an excellent chance of penetrating the "corporate veil" and going directly to the officers', directors' and shareholders' pockets. * Charitable Adventures It is a sad but true statement that the prudent person today should refrain from serving in any responsible capacity for a charitable organization. One of the largest items on the national Boy Scouts' annual budget is their legal expense. Two scoutmasters take a number of boys camping. Boys will be boys, and not all scoutmasters are always perfect. The scoutmaster who was not at the lake while his partner allowed rough play to cause a drowning may be held equally liable as he accepted responsibility for all of the children. * Childhood Dreams You are so proud of your child. She has progressed well in school and been responsible in all her habits. For a seventeen year old, she is remarkable. She does, however, like rock music. While returning from the grocery with your salad fixings her favorite new song is played on the radio. She turns up the volume on your expensive car stereo. Way up. She does not hear the siren of the rescue vehicle overtaking her to pass. The ensuing wreck leaves a trail of havoc that leads right into court. Your insurance company settles the first case for policy limits leaving you high and dry on the other cases. Being responsible for her until emancipated, you are left holding the bag for her accident judgments. You can fill in many other examples from the newspapers or the experiences of people you know. If you do not keep some of your assets beyond the reach of U.S. courts you are courting financial ruin. This book gives you the background needed to begin the process of lawsuit and asset protection. It is not designed as a tool to prevent one from paying his normal and ordinary debts. But the extraordinary and unintended financial calamities that can occur too easily in our litigious world can be defended against with these techniques. Asset protection is just one of the reasons for international diversification of your investments. Even with no asset protection issues involved, the international diversification is important from an economic viewpoint. Understanding the investment risks Higher returns and greater diversification are compelling reasons to add foreign securities to your portfolio. But before you consider any type of international investment, it is important to understand the risks that accompany the added benefits. In the short term, international stocks may fluctuate in value more than U.S. stocks, due to currency fluctuations as well as political and economic events. Foreign securities are purchased and traded in the currency of the home country. This means when you buy foreign stocks, your U.S. dollars must be converted into the local currency; when you sell, the currency is then converted back into U.S. dollars. As a result, movements in the local currency relative to the U.S. dollar also bring changes in the value of your foreign investment. When the dollar weakens, your foreign investment increases in value; when it strengthens, your investment drops in value. If, for example, your Japanese stocks rise 12% and, at the same time, the U.S. dollar moves up 4% against the yen, your net gain is only 8%. The reunification of Germany. The collapse of the Soviet Union. Civil war in Yugoslavia. The past few years have provided ample evidence that many governments are considerably less stable than the United States. And, political instability clearly affects investment values and share price volatility. Economic events can also have a greater impact on the value of foreign stocks than on U.S. stocks. This is because many economies are less diverse than that of the United States. For instance, a poor coffee crop would cause greater damage in Brazil's overall economy than a poor orange crop would to the U.S. economy. In deciding which category of international investment is right for you, consider which best matches your risk tolerance. Generally speaking, the broader the geographical area you invest in, the less risky it's considered to be. The more targeted the investment, the greater the growth potential -- and, of course, the risk. For example: * If your objective is to diversify your portfolio but you're uncomfortable with high volatility, you might consider a broadly diversified managed international portfolio, or a mutual fund. This type of investment also has appeal for investors who do not have enough time to regularly monitor the international markets. * If your primary interest is growth and you're willing to take more risk for potentially higher returns, then you may want to choose a targeted investment that focuses on a specific region, country, or emerging market. These investments are also attractive to investors who prefer to track individual markets and events more closely. Don't do illegally what you can do legally One of the problems of global investment strategic planning is the naive fool who breaks laws without thinking through the consequences. For example, as a consultant, I once had a call from a certified public accountant in a major American city, who said he had a number of clients who wanted to establish "secret" bank accounts in the Cayman Islands. He said his clients were paying all of their taxes, but were very concerned with secrecy, and wanted to be certain that the U.S. government would not learn about the accounts. He became greatly offended when I explained to him that all of his clients were crooks. I explained in detail that no U.S. citizen (or resident) could have a "secret" bank account, because it is a felony to fail to immediately notify the government of the existence of the account. The penalties for such secrecy at that time were far worse than any possible tax offense -- today the penalties have been increased so severely that no American should even contemplate such a violation. One bribed bank clerk (perhaps for a mere $100) in a so-called secrecy jurisdiction could put the client in prison for 10 to 15 years under new mandatory minimum sentencing laws. There are numerous legitimate ways that a U.S. citizen can make foreign investments without running afoul of these draconian laws. The most dangerous fools -- to themselves as well as to everyone they deal with -- are those individuals who fail to understand the serious implications of their actions. They deal with lawyers, accountants, and/or bankers as if there was nothing legally wrong with their actions, and then seem startled when the family accountant or banker facing many years in prison testifies against them, because he was dragged into something he had no intention of being a part of. Or worse, they wind up blurting out their incriminating intentions to a lawyer or accountant who immediately notifies the authorities, frequently setting a trap for them. (Remember, lawyer-client confidentiality does not apply to stating an intention to commit a crime, and the lawyer is legally obligated to report it.) Many U.S. professionals today (perhaps fearing a possible set-up by authorities) venture on the side of caution and immediately report such approaches. This is no secret -- it has been recorded in many, many court cases, but the naive clients continue to get convicted. The penalties for most of the bank secrecy and money laundering crimes (money laundering includes moving unreported cash, even if you are the legal owner) are several times the penalty for armed bank robbery. Most of these people would never consider committing a bank robbery, and if they were to plan such a crime they would choose their partners with extreme care, and full awareness of the consequences by all parties concerned. Yet they think nothing of committing financial crimes with far more serious penalties, and cavalierly involving others, as if it was a big joke and nothing to be seriously concerned about. There are enough legal means to accomplish the same ends that nobody needs to commit these crimes. Be prepared At any point in time, there are always some potential catastrophes waiting in the wings. Most never occur. The ones that beat the odds, however, are the ones that really clobber us. That's why you should take reasonable precautions now to diversify your savings abroad. After all, taking steps to guard against the unexpected is what prudence is all about. This guide will show you exactly what to do and who to contact to help you do it.