Copyright 2012 by John T. Reed
As gold prices in U.S. dollars soar, intelligent people should be concerned about the future purchasing power of the U.S. dollar AND about their ability to convert dollars to other currencies. You can hedge against inflation by using dollars to buy hard assets, but hard assets are generally illiquid. There are some relatively liquid hard assets. I wrote an article about that. I also discuss them in my book How to Protect your Life Savings from Hyperinflation & Depression.
Lack of liquidity—inability to pay current bills—can bankrupt you even though at the time you had a substantial net worth, albeit tied up in illiquid hard assets.
Foreign currencies are not hard assets. They are the fiat money of other countries. But not all countries are racing as fast as they can toward federal government bankruptcy like Japan, Greece, Italy, Iceland, and the United States.
In my book, I said that the economies and currencies of almost all nations are tied to the U.S. and its dollar. True, but that does not mean all countries will react to hyperinflation in the dollar by “printing” huge amounts of their own currency and thereby hyperinflating it, too.
Hyperinflation of the U.S. dollar would actually be good for countries that import from the U.S. or who wish to visit the U.S. as tourists. That, in turn, means U.S. exporters and tourist businesses would benefit from a weaker dollar.
So although a financial crisis in the U.S. and its dollar would probably cause financial distress around the world with our trading partners and countries that use the U.S. dollar as a reserve currency, it will not necessarily cause those countries’ currencies to inflate or inflate as much as the U.S. dollar.
The Heritage Foundation does an annual Economic Freedom Index of the world. (At that web page, you can sort the countries by clicking on the title of each column. For example, if you click on financial freedom, it will sort the countries in order by worst financial freedom to best. To make it best to first, click on the little arrow next to the title heading.) One component is financial freedom, which is defined at http://www.heritage.org/index/financial-freedom. If the U.S. dollar does lose purchasing power by significant amounts, you would want to convert your U.S. dollars to the currency of a country that has less inflation. Of course, you get a better price by doing it now, before the devaluation of the U.S. dollar happens.
I have previously written about such measures of a foreign currency as debt-to-GDP ratios and Transparency International corruption index. Here let me add a third: Heritage’s financial freedom. It is rather simple, there are three countries that Heritage scores 90 out of 100.
Australia, Hong Kong, and Denmark
Of these, Australia also scores high in debt-to-GDP ratio (21%) and lack of corruption. I rate it high for being a fellow Anglo-Saxon, former British colony. I feel comfortable in such countries and trust them to treat me like they treat their own citizens.
Hong Kong, is a former British colony, albeit not a place where I felt like one of the boys. It is a Chinese province that speaks the Cantonese dialect. I felt xenophobia there and now that it is a subsidiary of Communist China, I would not trust them.
Denmark is a nation of Danes. Have not been there but I have trouble imagining that a country whose people are different ethnically from nearly all Americans would—in a financial crisis—suffer financially in order to pay their debts to Americans. Denmark is also tiny so I expect the market for their krone might be too thin to count on using that currency in the U.S. in a pinch.
Among the countries Heritage rates at 80 on financial freedom are:
• Canada where I already opened a local currency bank account
• Finland which ranks very high on lack of corruption and was the only country to repay the U.S. for World War I debts—but it uses the euro so forget Finland for now
• New Zealand which has great debt-to-GDP ratio and integrity albeit being relatively small (lager size than Denmark but smaller GDP)
The other countries scoring 80 are Sweden, Switzerland, Netherlands, and U.K. Forget Netherlands because they are a euro country. UK may be of some interest. Sweden and Switzerland generally rank high in all categories but they are “furriners.”
One country that does not score 90 or 80 on financial freedom is the U.S. It scores 70.
No country gets a 100.
I hasten to add that financial freedom can change overnight and will when the country in question gets into financial difficulty. The basic idea is you want to avoid being in a country the currency of which loses significant purchasing power and which slams the exits shut on getting your money out of that country and currency.
Bottom line, I still like Canada, Australia, and New Zealand. I am leery of non-English speaking countries who seem like fair-weather friends based on history. India is sort of an English-speaking country, but I lump them with non-English speaking countries because Hindi is their pre-British colony and still widely spoken language. The euro is riding for a fall so using U.S. dollars to buy euros seems like nothing but a way to experience financial disaster a little sooner.
There is a temptation in these analyses to get too deep into which country is “best” or which bank in that country is “best.”
Who cares? All you need is adequacy with regard to the purchasing power of the currency being relatively uncorrelated with the purchasing power of the U.S. dollar. In other words, a currency that will not be “printed” in massive quantities so its fiscally irresponsible government can pay its impossibly high bills.
The issue is will the nation’s currency hyperinflate worse than the U.S. dollar if and when the U.S. dollar hyperinflates.
If you buy, say, Australian dollars, and hold them in Australia or some other bank outside the U.S., and the Australian dollar inflates the same as the U.S. dollar, you are no worse off than if all your money was in U.S. banks. If the Australian dollar inflates less than the U.S. dollar, you are better off having Australian dollars outside the U.S.
If they are held inside the U.S., in Everbank, the only U.S. bank that allows individuals to hold foreign currency accounts, the U.S. government may order Everbank to convert your foreign currency accounts into U.S. dollars. That would render the whole exercise null and void and you would lose your protection from U.S. dollar inflation. The U.S. government cannot order banks outside the U.S. around.
In addition to overall score and financial freedom score, Heritage uses nine other criteria to get to their overall score. Depending upon the details of your business or financial statements, you may find countries that rank high in other areas like labor freedom or property rights better for you than countries who rank high overall or in financial freedom.
John T. Reed