For decades, those of us skeptical of our central banks’ monetary experiments have tried to punish them for their excesses – reign them in, have them follow a stated rule, or at least provide a way for us critics to opt out of their system. Immunize ourselves from whatever havoc they’re wrecking.
Projects have come and gone: e-gold, DigiCash, B-Money, Bit Gold. Yet, on a personal level we must persevere, regardless of how little you think of those rapidly diluted U.S. dollars. For the post-war generation, gold often allowed some measure of protection, but its history in 1914, 1933, and 1971 indicate some of its limitations – when push comes to shove, it’s not that hard for governments to seize, debase, or ban it. For my parents’ and grandparents’ generation, houses and subsidized mortgage rates played another such role. You could, as my grandfather often remarks, “build capital” and “amass savings” this way: buy a house with as much borrowed money as you can access, pay low – sometimes negative – real interest rates, deduct part of the expense from your tax bill, and ride the housing boom all the way to comfortable wealth.
In the new millennium, that housing boom trend has continued – in addition to rallying stock markets. The most vocal critics call it “The Everything Bubble.” To quote Steve Carell’s character, Mark Baum, in The Big Short: “Our whole system is built on ripping people off. How long can that last?”
For months and months, pundits of varying sophistication – including myself – have asked that question: Everything looks bubbly, I argued in January even before the GameStop debacle and r/WallStreetBets shoved malfunctioning financial markets into the purview of everyone outside the merry band of financial nerds. What’s the end game? How do we – or central banks, or governments who with one hand taketh away and another flushing us with cash – exit this madness? Looking at all of this, what’s a young person supposed to do – or a person in retirement trying to safeguard their meagre savings so that they last?
As monetary and fiscal central planners squeeze, there doesn’t seem to be that many ways out for us. Perhaps we could just, you know, exit.
This is a more fundamental argument than what it seems. Human societies have always flourished by acquiring that which better suits its individuals; through the ages people have embodied this tendency by simply moving – packing up and leaving – for greener pastures when the old no longer works. Sometimes peacefully and orderly, sometimes in great chaos during calamities and persecution. The United States foundational legend is to be the “Mother of Exiles,” as the famed line on the Statue of Liberty goes: Give me your tired, your poor / Your huddled masses yearning to breathe free.
Escape hatches are crucial when things go wrong. When rule by the people becomes rule over the people, when slight authoritarianism becomes tyranny, you want a way out. A government powerful enough to force your favored policies down others’ throats eventually passes into the hands of your ideological opponents – and the very powers that allowed you to force your preferred policies now allows them to do the same. Ilya Somin’s book Free to Move repeatedly uses symmetry arguments like these to warn against large, bloated, or even global governments: “We should not put all of humanity’s eggs in a single political basket, no matter how enticingly democratic it might seem.”
During the awful year of 2020, this thought has crossed the minds of many people. Some have put their money where their mouths are by moving to greener pastures within America itself. But you probably want to diversify a bit more: No investment adviser would recommend placing all your nest eggs in the same basket. Similarly, you shouldn’t place all your trust in one government. Set up shop elsewhere, either a literal shop or homes, attachments, or vacation places. Like you have emergency drills at work or teach your kids what to do during an earthquake, you should have plans for what happens when your government overreaches. Hop through the bureaucratic hoops before disaster happens: You want to have the alternative route set up before everyone starts running for the exits. Get a permanent residence elsewhere, or a second passport: for some, like those with Irish ancestry, it’s fairly straightforward to acquire one. As is an Israeli passport if you’re Jewish.
That would diversify your legal and governmental risk, just like you would diversify risks to your finances or career. To take the most extreme example: Many Jews who, in 1930s Europe saw the writing on the wall and managed to get some of their assets out – infamously to Switzerland – were less successful in getting themselves out in time. The financial escape hatch needs its physical (legal, regulatory, bureaucratic) counterpart.
Financial freezing risk is just another side of that same coin. A government keen on making your life miserable probably doesn’t have qualms in freezing your funds or confiscating your assets. Make sure you have a way out – emergency cash, jewelry, or the hyper-modern version of that: bitcoin. To work well, the financial escape hatch that bitcoin allows must be coupled with the legal, practical, and physical escape hatch that is migration.
Even the most erudite of Bitcoin’s skeptics, such as Frances Coppola, admits that this is a critically useful aspect of bitcoin: voting with your feet to simply have a way to get out from under a government keen on shutting the financial pathways we use for our everyday needs. Yes, bitcoin is expensive and cumbersome for the many everyday transactions you might need it for in an emergency – but it works, and short of holding you at gunpoint, there’s very little a government can do to prevent you from transacting as you wish.
Christopher Giancarlo, former chair of the US Commodity Futures Trading Commission puts it bluntly:
“[t]here is one thing that bitcoin is not. It is not a government construct. It is a social one. It bears no sovereign imprimatur, travels on no government payment rails and settles no government obligations. Perhaps most crucially, it is not subject to government monetary control.”
While the world isn’t quite in total disarray (yet?), 2020 taught us that governments can go further in clamping down on your freedoms than anyone thought possible, faster than anyone could have anticipated.
Houses and homes are great, but they’re not that easy to move – selling your physical belongings in a rush to escape an authoritarian government doesn’t seem like a particularly viable option in an emergency. You routinely purchase insurance for tail-risk events you don’t want to suffer; what I’m suggesting here isn’t that different – insure against the tail-risk outcome that your government and its central bank royally botch the tasks they have set for themselves.
We don’t know the nature of the next catastrophe, which means we don’t know which preparation is best suited for it. So, keep some flexibility. Keep more mobile assets; have larger buffers, financial and physical; instead of a large house in a nice suburb, perhaps aim for a smaller home coupled with a condo or house in a different jurisdiction? Don’t put all your financial eggs in one portfolio – keep some gold and some bitcoin; keep healthy; update your survivability skills.
Ensure that your escape hatches remain open.
Made available by the American Institute for Economic Research.