By Dr. Erik Hofmeister, WCI Columnist
I think a lot about my country falling. This is not a new phenomenon. Growing up in the ’80s, my mom taught at Beverly Hills High School. Many of her students were children of wealthy Iranians who fled their country as the Ayatollah took power. She was also interested in history, so I learned about Cubans fleeing when Castro took over and how Germany got taken over by the Nazi party. Growing up in California, I learned all about the internment of American citizens who were of Japanese descent. Whether accurate or not, I definitely learned the lesson growing up: “If your country is about to fall, get out before it does.”
We spend a lot of time in personal finance talking about shallow risk (e.g. volatility) and one of the deep risks—inflation. One of the other deep risks—confiscation—is rarely discussed. Given my upbringing, I’m tackling it today. What is it, when has it happened, and what can you do to hedge against it?
Confiscation is the loss of your assets to another. I have three scenarios in mind. 1) Legal confiscation by the government, such as when you owe a debt to another (e.g. a court judgment) or by paying taxes. Basically, you are transferring money from your account to the government. 2) Illegal confiscation by the government, such as seizing your assets because the people in charge don’t like what you say. This may be masked as legal confiscation, but I consider it separately because historically the laws have been selectively applied to certain groups of individuals. 3) Illegal confiscation by a private citizen—i.e. theft.
Government Confiscation in the 20th Century
Let’s look at the history of illegal confiscation by the government.
Before the Iranian Revolution of 1979, GDP was over 13% for more than a decade. After the revolution, the new government seized the assets of numerous businesses and private individuals. Ayatollah Khomeini ordered the seizure of property of those associated with the former Shah—including artists, craftspeople, and merchants—even though they may have had no actual organic association with the Shah. Over 80% of the economy came under government control, and inflation was between 12%-20% a year over the next 30 years. By 1980, the GDP went down to -20%.
At the time of the Cuban Revolution in 1959, Cuba’s GDP ranked seventh in Latin America. The Cuban Revolution was the overthrow of the dictator Batista who was eventually replaced by Fidel Castro. Castro set about expropriating property owned by Cubans and other nationals, including Americans. Oil refineries were nationalized, and the US placed an embargo against the country. Cuba became dependent on Soviet subsidies for its economy to function until 1990 when the Soviet Union collapsed and sparked a significant economic collapse in Cuba. The GDP from 1959-2006 was 0.92%, about half that of other Latin American countries.
Aryanization was the Nazi term for the seizure of assets from Jews and its transfer to non-Jews started in 1933. Initially, it was held under a veneer of legality before devolving into outright confiscation. Between $230 billion and $330 billion was stolen from Jews throughout Europe, and thousands of businesses were Aryanized.
Although not due to a “fallen” state, the US government in the 1940s relocated and incarcerated more than 80,000 US citizens on the basis of their race alone. Individuals were forced to sell property and businesses at fire sale rates, goods were lost or stolen, and earning potential was drastically reduced. Records were sparse, but estimates are that at least $77 million was lost, with only $37 million being compensated later.
There are untold numbers of other examples in history. One of the scariest consequences of confiscation is often that it precedes or is concurrent with the restriction of freedom (imprisonment, visa bans, etc.) and/or sanctioned violence.
So, we’ve established that confiscation has happened and can happen. Will it happen in your country? It’s impossible to say, just like it’s impossible to predict inflation. But if you’re interested in protecting your assets from this deep risk, there are a few steps you could take to hedge the risk.
Protecting Yourself Against Government Confiscation
#1 Education
Educate yourself about the fiscal policies in your country and the politicians and then act accordingly. You can vote, donate, volunteer, and otherwise peacefully advance the democratic process. It’s generally easier for governments to control fewer people, and scared or uneducated people seem easier to control. However, this is not a panacea. The referendum to create an Islamic Republic after the Iranian Revolution purportedly had a 98% “for” vote. Remember, “This is how liberty dies . . . with thunderous applause.” There’s no real drawback to education that I can see.
More information here:
Optimists Are the Best Investors, Even If the Pessimists Sound Smarter
Some Surprising Things I’ve Learned in 20 Years of Investing
#2 Cryptocurrency
One of the main use cases for cryptocurrency is this exact scenario. You can leave your country and still access your assets. A cryptocurrency hedge against confiscation works. Whether that cryptocurrency will be worth what you paid for it, though, is hard to say given the wide fluctuations in value.
#3 Treasure
Crossing a border with a briefcase full of cash is hard. Crossing it with a handful of valuable jewels in your shoe is less hard. People have often kept valuables at hand in the event of the need to escape a situation. If your Vanguard assets are frozen, having some cash or readily solid tangible property may help. If you have $10,000 in Krugerrand gold coins to help you flee the country, that’s probably not going to put any meaningful drag on your portfolio. If half of your assets are in these kinds of valuables, you would expect an overall poorer return.
#4 Have a Skill
Medical professionals of all types are needed in numerous other countries. You may need to get your license transferred and go through some other hoops, but you could find gainful employment in your same or similar high-paying career. Your assets may have been seized, but you can still work and generate a good income and hopefully reaccumulate those assets. You will at least be better off than those who have less valuable skills to offer other countries. I don’t see any disadvantage here except for the time used to acquire that skill, but hopefully, that’s already a sunk cost.
More information here:
How Moving to Canada Affected My Life as a Physician
#5 Learn a Language
One of my intern-mates was a native English speaker who trained in vet school in Montreal, so all of her medical knowledge was in French. This was only a minor barrier since numerous medical terms have a Latin or Greek root. If you can speak Spanish, how much easier would it be to obtain a professional job in a Spanish-speaking country? There may be some costs associated with language courses, in addition to the time it would take.
#6 Leave
It’s certainly easier to leave your country as an expat than as a refugee. You can get a job, get a work visa, a place to live, and maybe even move some of your assets to your new country. Assets tied up in retirement accounts may be stuck unless you want to pay penalties and taxes to take them out. The greatest drawback to this approach is that there are all kinds of things you may be giving up by leaving “prematurely”—before confiscation is likely to occur. You may have to sacrifice relationships, ask your siblings to take care of your aging parents since you’ll be an ocean away, give up earning potential, and have a different standard of living or quality of life. It’s a major life change for a relatively unlikely event.
More information here:
I’m Retiring in My Mid-40s; Here’s How I’ll Start Drawing Down My Accounts
Should You Worry About Government Confiscation?
Even though I think about confiscation a lot, I don’t worry about it very much. Like all things personal finance-related, there are important behavioral considerations. I don’t worry much about confiscation for the following reasons.
- I like to embrace optimism. I think hope is better than fear. Like Winston Churchill said, “Democracy is the worst form of government except all those other forms that have been tried from time to time . . . ” I remember reading a non-fiction book set in the early 1900s and thought, “That sounds a lot like the problems we are facing now in this country.” The country survived those trials, and hopefully, it will survive a few more.
- I have a marketable skill, a license recognized in a half-dozen English-speaking countries with similar veterinary medical systems, some foreign language competency, and the continued ability to work hard. I don’t have any significant barriers to moving (such as an invalid family member). If all of my property were seized, I think I could make a good life for my family elsewhere (as long as I could get out with my health and freedom). Right now, I am in a good academic job and planning to retire in my 40s in 2025, but those plans could be put on hold in the event of political calamity.
- I think there will be some time between when the government decides to start seizing assets and when they get to mine. I think I’m a relatively small fish and not particularly outspoken politically. This is in contrast to family members of mine who are deeply involved in politics and are already making plans to flee very quickly if things even start to seem to turn in the wrong direction. Maybe this is similar to believing one can time the market. But my trigger to flee is pretty low given my upbringing, so I’m hopeful we could make it out before the curtain comes down.
- There’s not much beyond voting certain ways that can be done about it. I like to focus on my circle of control. This is one of the “prepare for the worst and hope for the best” situations, but causing yourself great anxiety by preparing for the worst beyond reason can significantly impact your daily happiness.
I’m afraid it’s impossible to discuss confiscation without delving somewhat into history and politics, which is generally undesirable on a financial blog. But confiscation IS one of the deep risks to your financial life. Just like any other financial risk, you need to spend some time thinking about it.
What hedge strategies against confiscation would you add? Have you ever been worried about government confiscation? Are you now? Comment below!
(Source)