Earlier today I received an email from a concerned member of the Sovereign Society:

“I just read a rumor that a bill is working its way through the U.S. Congress, that if becomes law, would authorize the federal government to seize all 401k’s and IRA assets. These assets would then be placed in a federally administered plan to provide ‘equal and adequate protection’ of assets for all retirees. This sounds like what recently occurred in Argentina. Have you heard anything about this and is such a scenario possible? If so, then would being offshore prevent a potential seizure?”

I certainly am aware of the situation in Argentina where, last October, President Cristina Kirchner confiscated US$29 billion worth in the country’s ten privately managed pension funds. This was presented as an emergency measure to meet her faltering government’s financing costs that had soared as Argentina’s commodity prices on exports had tumbled and thousands of farmers were on strike.

Double Defaults

This grab of private property was nothing new for Peronista Argentina. In 2001, Argentina defaulted on US$95 billion worth of government debt after a three-year economic meltdown that left Buenos Aires in bankruptcy.

At the time, that was the biggest government debt default in world history; but since then that number looks like chicken feed compared with the trillions in government bailouts of banks and private businesses in the U.S., U.K. Germany, France and elsewhere. This radical government expropriation of private funds only worsened Argentina’s situation and they are once again on the verge of national bankruptcy.

In a breathtaking piece of bravado, President Cristina Kirchner brazenly claimed the grab would “protect” retirees from the global financial crisis, while denying she was trying to “grab the cash” to pay off debt or to finance new programs or projects.

Expert Viewpoint

I turned to Larry C. Grossman, CFP, CIMA, Managing Director, Sovereign International Pension Services (no relation) and a member of our Sovereign Society Council of Experts. Larry specializes in converting American pension plans to offshore venues, which current U.S. law allows.

Here’s Larry’s opinion: “There have been several different academic papers published over the last few months, which have given rise to rumors such as these. At this point in time I am unaware of any such pending legislation.

“It is difficult to sort out fact from fiction and to decide what format it would take if something like this occurred in the U.S. Many of us believe if it does happen, your best way to conserve your assets would be to already have them placed offshore. There is an old saying that ‘bank robbers go to banks because that’s where the money is.’

“I have clients who own non-U.S. real estate in their IRAs and have done so for many many years. I think it would be difficult (although not impossible) for the government to force assets such as these to be repatriated to the U.S. Instead they would probably focus their efforts on grabbing ‘the low hanging fruit.’”

And obviously, that could be billions in existing private pension funds located and administered within the U.S.

History Repeats Itself

Beyond belief? Read American history.

* Within days of taking over the presidency in Mach 1933, President-elect Barack Obama’s hero, President Franklin D. Roosevelt, ordered all Americans to surrender to the government all their gold and gold-backed currency, allowing only small amounts for personal jewelry and dental fillings. In return Americans got devalued paper currency.

* In the last 25 years federal and state police and prosecutors, under the guise of the failed “war on drugs,” have seized billions of dollars worth of real and personal property under the civil forfeiture program. Only 20% of the property owners were ever charged with any crimes, but very few got their cash or property returned.

“The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property“,says the London Telegraph columnist, Ambrose Evans-Pritchard,

“It’s a foretaste of what may happen across the world”.

World Recession An Excuse

It started with subprime mortgage borrowers, moved on to banks and has now progressed to whole countries. Iceland has already thrown in the towel, and Argentina stole its citizens’ pensions. Socialized bailouts and government controls are now the watchword in Washington as well.

Already governments in the U.S., Britain, and Europe are mightily meddling in the markets under the guise of “saving the system”, by taking ownership stakes in banks that rank above the rights of existing bank owners, then telling these banks how much to lend and what they must do with the cash. Ditto for auto and insurance companies.

Anything Can Happen

In response to that email from our Sovereign Society member, I replied that it is possible that some brainless members of the U.S. Congress may have introduced a bill that seeks to nationalize pensions, but I hope that it will not be given serious consideration, even by the liberal Democrat majority now in control.

For one thing, adopting such a law would be a major psychological blow to Americans’ confidence, possibly to the value of the dollar, and to the worldwide credibility of the new Obama government, at a crucial time when financial confidence is low and going lower.

But I served in the U.S. Congress when Democrats were in control and I’ve seen what happens when the Republicans are in charge. Meaning simply; anything can happen!

Source: Will Obama Nationalize U.S. Private Pensions?

Buenos Aires, Argentina June 11, 2008

“And to think that I had to face a totally adverse situation… I wouldn’t have missed such an opportunity”… I can imagine what ex- presidents Raúl Alfonsín and Fernando De la Rúa are thinking to themselves about now, because although a substantial portion of what happens in a country depends on the capacity of governmental management, it cannot be denied that a good economic situation helps facilitate positive results.

Perhaps Lula would not have achieved all that he has so far, had he been elected president of Brazil in the 80’s.  The clearest example of this is demonstrated by the current management style of Alan García, the president of Peru… for there is no clear distinction in the way in which he governs from that of the past.  The fact is that although his style of governing has not changed very much, what have changed are the circumstances facing his administration.

With each passing day, the people are more and more aware of the fact that Argentina is failing to take advantage of a historic opportunity to leave the traditional cycles of growth and crisis (stop-and-go) which has plagued this country in the past. Argentina is being transformed into one of the few world-wide examples of a country that creates its own crisis at a time when the economic situation is quite favorable.

Even the most optimistic leaders could not have imagined circumstances as favorable as the ones Nestor Kirchner had during his presidential term.  Starting out during a period of such great international circumstances and with the opportunity to “fine tune” things, no one would have imagined that in just a few short years the situation would have come to where it is today.

The simple fact of the matter is that Argentina does not tend to move forward to establish solutions to the problems confronting it.  This Monday the government did manage to take a significant step, however it was one that advanced its problems even more.

On Monday, the Argentine president, Cristina Fernandez de Kirchner, let the public know what the government intends to do with the additional income generated by the agricultural tax retentions (ones that surpass 35%).  The strategy they are actually proposing is to hold their ground and not to reverse the decision to enforce the new taxes… Instead they are trying to justify those measures, by claiming to use them to provide greater social equality for all.

Cristina announced a “Program of Social Redistribution”.  With the money generated from the recent increase in taxes, the Argentine government intends to construct hospitals and to invest in housing and the country’s rural roads.  The execution of these public works will be realized in a decentralized way via the creation of agreements with the respective provinces and/or municipalities where these works will be performed … Could this be just another ploy to maintain political control?

It certainly looks that way. It seems that these measures are a way to maintain political control in the provinces.

In fact, these announcements do not solve many problems. In the instance of several of the provinces in Argentina, the problem lies not in the need to construct new hospitals, but rather in the current lack of funds providing basic expenses for the facilities that already exist. This is the real problem to be solved.  The need the provinces have for more public works is less important than the need for more income to cover basic operating expenses (such as consumable supplies and maintenance costs, for example).

Cristina is worried about the poor, and for that reason she needs more resources… And she does not always use them wisely … An example of this can be found on the website Misionlandia, which recently noted:  “to travel to Rome, President Cristina debuted a new presidential airplane leased from Aerolíneas Argentinas at a cost of U$S 400,000, paid for by the Secretary General of the Presidency”.

I think Cristina will have to immediately discard her fashion advisor, for how can anyone seriously consider someone’s concern for the plight of the poor who is flashing around in a French Hermès foulard? And I wonder who her fashion advisor is?  It seems that Cristina likes to dress well.  A few days ago the English newspaper “The Guardian” selected a group of  Heads of State for a photo gallery entitled  “Kings of Bling”: lovers of jewels and all the upscale brand names… and guess who is located there in the top ten ranking of the most fashionable and ostentatious presidents…

Of course Cristina offered her  point of view on the matter: “It is a good policy for me not to be masquerading about as a poor person”.  But sometimes her image is not in accordance with her words…

A recent magazine article discussing Monday’s speech noted that while Cristina is a harsh critic of the farmers, insisting they stop their blockades,  “the president was using jewels costing as much as a 4×4 truck.  She was wearing a Rolex worth about $20,000; on her left hand was an 18 carat ring of white and yellow gold with a brilliant solitaire, and on her right hand is a sapphire ring set in platinum and gold, each purchased from luxurious shops from abroad and valued at  $ 10,000 apiece… and a pair of hoop earrings valued at $10,000”.  A prestigious Italian newspaper, “Corriere della Sera”, presented the matter in a different way noting that Cristina “spent an hour shopping on Via Margutta” during the FAO summit in Rome and that she has bought jewelry in the prestigious Bvlgari’s jewelry store “Enigma” …  Clearly the government had to deny the report, but the number of details in this article regarding the shopping spree certainly gives one a reason to think.

Back to today’s article, here is my conclusion regarding the presidential speech on Monday: Argentina’s problems continue without being resolved (and worse: yesterday was the debut of the new price index methodology, one that is every bit as much as fraudulent and biased as the one it replaced)…  I have already told you about what can happen when problems are not confronted realistically by using solid measures to resolve them.    And what worries me more most is that the poor are going to be the ones affected the worst by the costs created by these mistaken political decisions.

We will meet again tomorrow,

Horacio Pozzo

Whenever Chavez gets a chance, he gives speeches in which he pretends to support the people that socially need it the most.Paradoxically, their policies have negatively affected the general population rather than helping them, hitting the bread basket (canasta basica) harder in the same lower social classes that he claims to protect.

A mother saying to her child: “Son; would you go to the store and buy a pack of noodles and a bottle of corn oil so I can fix lunch for us today?” to which she adds: “here, take more money with you just in case the prices went up again today” is, without a doubt, a common household conversation in Venezuela (as a matter of fact, it is a common household conversation in most of the countries with this new food inflation context, but is apparently much more serious in Venezuela).

The worldwide increase in food prices is an issue that concerns us all. To relieve the effect that this has in weaker countries, the IMF is revising a special loan to bring financial aid to the countries that have been affected the most by this increase, as soon as possible.

The seriousness and extent of the situation differs from country to country. Venezuela’s case is one to be concerned about not only because of the foreign pressures on the market prices, but also Chavez’s orders to the government to put even more pressure, a dangerous cocktail and time bomb.

What was Chavez’s idea given the increase on food prices? The answer is simple, price controls, a practice not very different from other neighboring countries. This is the method he used to control prices of a wide variety of other products such as rice and milk, thinking that fixed prices would not affect farm production whatsoever. Does this sound logical to you? What would you have done in farmers’ shoes when the local government decides to fix a price cap on crops as the worldwide prices continue to increase?

The result is written in every basic economy manual; the production has fallen and shortage has taken over the market… Which is something the Chavist’s theory of economics did not contemplate. But that’s not all; this theory also stipulates (most importantly of all) that if producers take back their supply and the market’s demand remains the same, the prices will increase even more.

Local people commonly believe that “Chavez imposes price control to protect the poorer part of the population” However, this situation in price control is what has made the situation worse and has generated greater inflation.

Didn’t Chavez intend to use socialist economical theories to make the distribution of income equal for his people? The answer is yes, but he seems to have forgotten that the greatest threat to the poor is inflation, they are the ones being affected the most by these measures and when the engine hits full speed, their salaries will just not be enough to survive.

Growing inflation is regressive…what does this mean? This can be understood if you compare it to taxes that are used more on those who less have. According to the Central Bank, 45% of the average Venezuelan lower class family’s salary is spent on the purchase of food. So, since the inflationary acceleration is more severe on food products, it is only logical that the poorer families are the most affected.

If inflation in different trades were homogeneous, the lower class would still be the most affected part of the population because they have less coverage capacity compared to higher social classes.

In what situation does Venezuela find itself today? Food prices in the last 12 months have increased in …(take a deep breath)… 41.5% (there is even speculation that this will increase!!). Private estimates show that 15% of Venezuelan families (roughly 4 million people) have an income lower than the basic food basket, and 38% cannot cover the expense of the basic basket.

As inflation soars in Venezuela, Chavez’s popularity is in steep decline, and the situation in this country is unstable day by day. Very few think that Chavez will react in time to turn things around and change his economical policies.

For some it is already too late.

We will meet again tomorrow,

Horacio Pozzo

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