Two serious questions about a "currency reset"...

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tankerfirstofficer
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Two serious questions about a "currency reset"...

I would like to solicit other views about an issue that I'm grappling with for the past several weeks. This is probably the best place of all to ask. ;-)

First, some pertinent background for perspective: I've followed the metal markets since 1985, and have followed it pretty much on a daily basis since 1998. I use the term "followed" in both cases in the passive sense. I never traded metals... I only maintained a close awareness of them. Furthermore, I never actually owned any metal until 2008, when I finally "woke up" and stopped defending this miserable system in which we find ourselves today. I say this as someone who had "Gone Galt" back in 2001. I shut down a consulting firm I ran and retired (went on strike) because of the massive amounts of horse manure that I would have to wade through in order to get anything accomplished -- courtesy of our friendly Imperial Federal and State Governments.

My aversion to metals was the result of buying into the notion that metals were "dangerous investment vehicles." While I understood some of the aspects of how government can literally sap the desire to create jobs and wealth in favor of pursuing leisure, I remained so utterly ignorant of the importance and role of precious metals until many years later.

At present, I hold "physical" metal in allocated depositories in several locations in the United States and abroad, and a small portion of REAL physical metal where I can easily access it if needed. I'm under no illusions about the metal held in depositories. While I can and have audited these holdings, I believe it may very well disappear in a SHTF scenario. Right now though, this stuff stays in depositories.

As the situation in the United States plays out, things must -- by necessity -- get worse. The fundamentals of the situation are deteriorating, and the insanity increases daily. This government-supported fascistic feeding frenzy on our freedom, liberty, and purchasing power are ever-growing, and will never be sated... no matter how high the debt ceiling might be raised. But with this said, I don't believe that a SHTF scenario is a likely one. It is a possibility most certainly, I just don't believe it will be a likely possibility, that's all. Also, I don't hold metal today under any illusion that it is any kind of "investment," but rather a store of value of my past productive effort and creativity. Nothing more. (Furthermore, I have never looked at any home I've lived in as an investment either... it was an asset that provided UTILITY, nothing more. The longer I used it, the less it costs over time.)

Okay... with that said, I have a hard time envisioning some transformation to the use of silver bullion to buy groceries, gas, or other necessities. I don't believe bartering metal for goods is something that is going to transpire, as it is horribly inefficient. Yes, I believe metal is money, but I just don't see how it's going to take hold as an accepted medium of exchange in this brain-dead environment.

One idea posited by some is that a new currency will be required when the FRNs lose their purchasing power completely -- when nobody wants to hold it any longer. This is an inevitable conclusion to fiat money, but it is also a situation that TPTB probably have also anticipated. I don't believe they're stupid... filthy, lying, scumbags YES; stupid NO.

Let's assume a new currency arises from the ashes of the FRN, but this time it is backed by precious metal -- say it is gold for the sake of argument. In order to conduct commerce, the "currency du jour" is going to be needed -- much as FRNs are now. In order to obtain these, metal would have to be redeemed -- and capital gains taxes would have to be paid at the rate of exchange, given how this metal is priced with respect to the old currency. (By the way, I don't know how the typical brain-dead American without any metal is going to manage to function is a mystery to me, but I must assume that people wake up at some point).

Governments don't "just forget" about taxes... especially capital gains taxes on monetary metals. I also expect these taxes to rise to stratospheric proportions in the coming months (or years?) as this system continues to fail.

So here's my question, which I believe I have answered -- but don't fully feel confident about it. This is why I ask the two questions here:

1. If metals are used to protect our savings from the ravages of inflation, isn't a capital gains tax on our metal holdings a guaranteed way to shoot that plan in the foot? I must assume that buying metal and being abused on the tax issue is better than not buying metal at all (basically, having 50% of your metal holdings after tax must be better than having 100% of worthless currency following a reset, right)?

2. Is there anyone from Argentina following these forums who can shed light on precisely what occurred in that nation when they went through these spasms of "government run amok"?

Without a model, I'm pretty much guessing as much as the next person... but action must be taken with the best available information at the time -- and this has been done. I just want to ensure I get it right, and share that knowledge with others for their benefit as well, if possible.

Thanks for hanging in there and reading this... it's very much appreciated in advance! :)
tanker1st.

Edited by admin on 11/08/2014 - 06:06
tankerfirstofficer
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Ugh... sorry for the

Ugh... sorry for the double-post. I want to delete one of these, but can't. Apologies all around folks. :(

dmanson
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Good questions

I never thought about it that way. I assumed that PMs would be traded for large purchases like land or something. Makes sense though that the government would tax the hell out of gains from selling metals.

In that case, you may consider establishing some kind of tax-exempt trust that holds the metals. The trust could fund the purchase of land or something. Of course speak with lawyers, accountants, etc.

I plan on passing them down to my children without ever selling them and hope that they can do the same. Just for piece of mind to know you or your kids will never starve. I don't have a whole lot so there probably won't be a big temptation to sell.

Pyrat
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will capital gains be indexed?

These are some legitimate questions. Congress has shown no willingness yet to eliminate capital gains on phantom gains from inflation. A lot of the purpose of inflation is to seize wealth, so I'm not sure that they'll ever index them. However, higher inflation rates will certainly lead to a movement to index them to at least something like the CPI.

If hyperinflation occurs under our current system a lot of cash transaction are going to become illegal without a lot of paperwork. Currently, you are required to file paperwork whenever you receive $10,000 or more in cash from a sale. Can you image how crazy that would be if McDonald's had to file paperwork whenever someone wanted to buy a hamburger? 

I'm hoping that the hyperinflation will cause less compliance with govt regulations in general, but most of the American people still love Big Brother so I don't count on it. 

thecoloredsky
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tankerfirstofficer

tankerfirstofficer wrote:

Governments don't "just forget" about taxes... especially capital gains taxes on monetary metals. I also expect these taxes to rise to stratospheric proportions in the coming months (or years?) as this system continues to fail.

So here's my question, which I believe I have answered -- but don't fully feel confident about it. This is why I ask the two questions here:

1. If metals are used to protect our savings from the ravages of inflation, isn't a capital gains tax on our metal holdings a guaranteed way to shoot that plan in the foot? I must assume that buying metal and being abused on the tax issue is better than not buying metal at all (basically, having 50% of your metal holdings after tax must be better than having 100% of worthless currency following a reset, right)?

2. Is there anyone from Argentina following these forums who can shed light on precisely what occurred in that nation when they went through these spasms of "government run amok"?

Without a model, I'm pretty much guessing as much as the next person... but action must be taken with the best available information at the time -- and this has been done. I just want to ensure I get it right, and share that knowledge with others for their benefit as well, if possible.

Thanks for hanging in there and reading this... it's very much appreciated in advance! :)
tanker1st.

First of all, have you read ferfal?

http://ferfal.blogspot.com/2008/10/thoughts-on-urban-survival-2005.html

He blogged about real world Argentina hyperinflation. That article breaks everything down in a huge post, which contains some snippets of gold references:

GOLD!!

Someone hit me in the head please because I messed up about the gold issue.
Everyone wants to buy gold! “I buy gold. Pay cash” signs are everywhere, even on TV! I can’t believe I’m that silly! I just didn’t relate it to what I read here because they deal with junk gold, like jewelry, either stolen or sold because they needed the money, not the gold coins that you guys talk about. No one pays for the true value of the stuff, so big WARNING! Sign on people that are buying gold coins. Since it is impossible to determine the true mineral percentage of gold, small shops and dealers will pay for it as regular jewelry gold. What I would do if I were you: Besides gold coins, buy a lot of small gold rings and other jewelry. They should be less expensive than gold coins, and if the SHTF bad, you’ll not be loosing money, selling premium quality gold coins for the price of junk gold. If I could travel back in time, I’d buy a small bag worth of gold rings.
Small time thieves will snatch gold chains right out of your neck and sell them at these small dealers found everywhere. This is VERY common at train stations, subways and other crowded areas.

So, my advice, if you are preparing for a small economical crisis, gold coins make sense. You will keep the value of the stuff and be able to sell it for its actual cost to gold dealers or maybe other survivalists that know the true value of the item. In my case, gold coins would have been an excellent investment, saving me from loosing money when the local economy crashed. Even though things are bad, I can go to a bank down town and get paid for what a gold coin is truly worth, same goes for pure silver. But where I live, in my local are small time dealers will only pay you the value of junk gold, no matter what kind of gold you have. So, I’d have to say that if TSHTF bad, gold jewelry is a better trade item than gold coins. Forgive me for not talking about this before, but I didn’t realize this until today, when I visited my local market warehouse and saw a “Buy Gold” sign.

So ferfal says that gold jewelry (junk gold) is more valuable because buyers don't care what the quality is. Now here's what I think. I don't think Argentina has a big coin market as the US and Europe has. It seems to me that jewelry maintains wealth in a more "cultural" way than in the US. Sort of like how India is real big on jewelry. If India ever went through a hyperinflationary period I would think it would be similar to Argentina in valuing gold devices. So, my opinion I think coins will have a better exchange in the US during hyperinflation, the opposite of Argentina. Another thing to note is maybe those sellers where he lived purposely didn't put extra value on coins, even though they knew they were more valuable. Doesn't matter really, since I think in the US, the coins will retain higher value because they are more well known (and they're stamped with purity marks!)

I think ferfal also said in another thread (forgive me, going off memory), that gold was going by the world spot price. If the US collapses, most of the world will get dragged down with it. So will there be a world spot price? If so, how would it even be measured? Maybe the spot price would be against the Swiss Franc? Not sure. This is the part of the Argentina story that doesn't translate in my mind. While Argentina was going through hyperinflation, the rest of the world was ticking. If the US goes down, then who takes up the slack as the world disintegrates? HKMEX? No idea.

Now, you think that the government will want to raise capital gains tax when selling gold, to possibly very high rates. I think the government will have to tread carefully because if there's no incentive to cash in gold for fiat, no one will sell it (unless forced too!). So, while I try to remain optimistic, I think that when we cash in gold for a new currency, I think they will make it very appealing so they can rebuild their gold inventories. People holding gold will obviously know its value and if the government can't beat that "value" the people won't sell it back.

Glad you asked these questions because I'd like to know what everyone else thinks too.

Jasper Puddlemaker
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Good points folks.  A few

Good points folks.  A few thoughts:

I Agree; it is likely not the end of the world.  Currencies will fail and be restructured, commerce will continue, governments will exist and will levy ever-increasing taxes.  So...

One has to convert their wealth to whatever they think will preserve it.   A portion of it has to be fairly liquid, which does not leave a lot of choices.  Not knowing for certain how things will play out (taxes?) is still preferable to going down with the ship.  If capital gains taxes become rapacious people will do what they always do; seek a work-around.  (Ever travel to a foreign country, and convert your currency to the local currency in a back alley transaction instead of at a bank?)  I think a lot of people would start doing that if taxes on metals reached a ridiculous level.

During periods of high taxation in the US a lot of people just stopped working once they reached a certain tax bracket; why work for "nothing," right?  So my point is governments will, in the end, shoot themselves in the foot by raising taxes to extreme levels.  It may take them awhile to figure that out, but they will figure it out eventually, and will lower them (historically that is what has happened). (Caveat: if we remain a capitalist country).

It seems like the key in what is ahead is to have staying power.  Be able to weather the season of insanity, and come out the other side without having had to liquidate one's assets.  Have staying power to outlast the fools.  Remember, governments are never proactive; they are reactive.  They will react to the crisis with rapacious and overbearing enactments, and will reverse them only when they recognize that it is harming them even more.  We have to outlast that.

I second the recommendation of "FERfal's" work.  His book is worth owning too; it is a primary "textbook" for what I suspect is coming.

ouchtouch
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Ferfal's book and blog are

Ferfal's book and blog are great.  He was careful to note, thought, that Argentina does not have a history of silver money, like the US.  Here, there are lots of genuine silver coins around, which people will revert to using in a hyperinflation.  I think pre-1965 silver coins are a better bet than gold jewelry.

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