Will Gold Be Currency Or Will Cash Be Illegal?

By Daniel R. Amerman, CFA

Overview

Will future gold profits be enjoyed on a tax-free basis because gold has become the new currency and cash isn't taxed when it is spent?  Or will governments around the world use the pretext of financial emergency to continue to take ever greater control of their citizens' private lives and make cash itself illegal, requiring all financial transactions to be in electronic form with a "cc" to the government?

Last year I wrote an article titled Hidden Gold Taxes: The Secret Weapon Of Bankrupt Governments about the "elephant in the living room" that most precious metals investors are unaware of.  In simple, step by step detail, I showed how the government uses taxes on false inflation "profits" to not only effectively confiscate profits from gold investors, but effectively create an asset tax.  So that the higher the rate of inflation, and the higher that precious metals prices soar - the more of the precious metal investor's starting net worth that is confiscated by the government in after-inflation terms. 

Among the many responses, nobody has even attempted to disprove the simple but irrefutable math of gold investor wealth confiscation through inflation taxes, but many people dispute the idea that gold profits will be taxable at all.  Some are convinced that the future is certain - that after the scoundrels are thrown out, right-thinking people will insist on the use of gold as currency, which means gold investors will reliably be relieved of tax obligations.  Others are convinced governmental breakdown and anarchy will make tax considerations irrelevant.  As I've seen discussed on internet forums, still other gold investors apparently find my concern about taxes to be the very height of naiveté if not downright laughable, and believe that I'm missing the point of discretely spendable gold and silver coins, which is specifically to avoid paying taxes. 

In this article about possible future scenarios, we will briefly look at the history of government actions during global financial crisis, as well as what governments are doing now, and we'll explore whether it is more likely that the future will be tax-free for gold investors, or whether the future may be one of crushing government control on a global scale that makes previous black market strategies obsolete.  If we combine history's repeating itself - but with more advanced technology this time around - many precious metals investors may just be making one of the biggest mistakes of their lives if they are not anticipating paying taxes in full at likely higher future tax rates.

The 1930s

In evaluating what may happen in the future, sometimes it helps to look first to the past. Let's take a look at the last time the global marketplace collapsed, leading to a major depression among all of the industrialized nations. Did the forces of government get overthrown by right-thinking individuals? Did gold become currency in response to the terrible economic conditions?

Let's consider Germany, which was enduring a terrible depression along with the rest of the world. The rights of individuals were not elevated – rather Adolph Hitler rose to power in an environment of pure fascism. Political change was indeed the result of depression and a failed global monetary system, but the change was not in the direction most would desire.

Let's also consider the situation of Japan. The Japanese economy was in depression, and it did have a gold-backed currency. In the real world, with actual history, the rights of the individual did not increase in crisis, nor did gold remain currency. Instead, the Japanese government led the way in going off the gold standard for domestic purposes, and they embraced militarism with the invasion of China to follow shortly afterwards. Hardly a supporting point for believing that global depression leads to a decrease in the power of the state and an increase in individual rights.

In  the United States, the response to global depression was the election of Franklin Delano Roosevelt. Which was soon followed by the US going off the gold standard domestically, and even going so far as to confiscate gold held for investment purposes at a price that was 41% below its then current value.

There was not a New Age of individual liberties in response to the last depression, but rather an extraordinary increase in federal government power.  This change would prove enduring as a federal government which had previously played a lesser role in what was supposed to be a United States of America (not a Federal Government of America) seized broad powers that put it in an unprecedented position of controlling much of the day-to-day life of the nation's citizens. It was in this environment that Social Security  was created, as well as the Federal National Mortgage Association, which was the first step along the path to our current federalized mortgage system.

Some people see these changes as having set the progressive foundation for a better and more just nation.  Others see the "New Deal" as having set in motion a process that ultimately destroyed the constitutional experiment and individual liberties that had created a great nation.  However, for the purposes of this article, let me suggest that whether one views FDR as saint or demon doesn't really matter.  The point is that it is quite clear that in the United States, the historical response to political crisis and economic depression was to radically increase the power of the federal government over the day-to-day lives of its citizens.

The Present In The United States

Let's fast forward to the current day and age, where this trend towards an increasingly powerful federal government at the expense of its own citizens has now reached the point where in the name of "security", federal government agents stationed at airports around the country have the legal permission to randomly sexually grope grandmothers and other citizens at will. This does not look promising as a trend towards individual liberties.

Let's now consider what has been happening with the reporting of financial transactions to the government.  For some time now, in the name of the "Wars" against drugs and terrorism, banks have been required to report to the federal government any transactions involving more than $10,000 in cash, or even any pattern of transactions that may make it look like that is the eventual goal.

There are broad changes to US reporting requirements that were snuck into the health-care reform legislation, that will be making life more difficult for small businesses and entrepreneurs in particular.  Form 1099-Misc will become more ubiquitous, giving the government far more information about the flow of money between individuals, even as it imposes new compliance burdens for anyone trying to help the economy recover.  The new 1099-K will have to be filed by all payment processors (such as credit cards companies) for any company or individual who receives more than $20,000 annually in at least 200 individual electronic payments.  This is the future of electronic cash in the United States, and this is what is already here.

The broadening US reporting requirements reach outside the US as well.  Starting in 2013 under HIRE, all US-sourced investment payments leading to financial institutions outside the United States will have to be reported to the US federal government, with pre-emptive 30% withholding taxes collected when the foreign entity doesn't prostate itself before US tax authorities and effectively agree to report to the IRS on the foreign activities of US citizens.  In other words, foreign banks, trusts, hedge funds and other entities investing any money in the US face punitive taxation on getting their money back out unless they formally put themselves under US law (effectively) and provide the IRS with detailed information on US citizens. 

All of this is in an environment where of course pretty much everything electronic is already seen by the government through its "Carnivore" system at Internet portals, which has the ability to record virtually all information that passes electronically through the Internet in the United States.   The government can already track all of our personal financial transactions today if it really wants to - so long as they are electronic.  There is, however, a gaping hole in the government's knowledge when it comes to cash transactions.  A hole that can be filled.

The Logical Next Step

When we look at history as well as the new laws still going into effect, does it seem preordained that gold will become cash as the government willingly hands back to the people their liberty and control of their individual economic and financial lives? Or is it more plausible that cash itself could become illegal, as a part of ever increasing government control over both the economy and the lives of individual citizens?

This concept of cash becoming illegal might have seemed like some rather radical stuff twenty or thirty years ago, even falling in the realm of science fiction. However, realistically, it describes most of the US economy at this time, as well  as other wealthy nations. For the vast majority of transactions that occur throughout the system, it is becoming increasingly rare for them to actually occur with physical cash. Credit cards, debit cards, and electronic fund transfers have become ubiquitous. Even checks don't work like they used to as they are instead instantly converted to electronic drawing rights. So most of the money in most of our lives - and most of the individual transactions for most of the population - is already electronic. It already passes through computers.  It already can be tracked electronically by the government.

So what would be more logical than for the government to require that all transactions be electronic, so it can insure 100% reporting compliance?  For this illustration, we will say that everything is done with a debit card or credit card, with (zero balance) debit cards available to everyone regardless of credit history.  Just wave your card in front of the terminal, this recent technology is already everywhere.  For individuals needing to pay each other, just send it on-line (waving smart phones at each other may be the new wallets), or even the poor can go to the much more ubiquitous ATMs that will now allow for direct electronic transfer between accounts.  Just wave both parties' cards, and enter the amount.  With a report of each and every transfer sent to the government, with both social security numbers for tracking.  Every dime taken in, every dime taken out, all available in the government data base by identification number for each person.

Again this is not science fiction, but only a slight extrapolation from where we are in 2011.  The poor already receive some of their government redistributions, such as food stamps, in the form of debit cards where spending can only occur in government approved categories.  Like many other people, I routinely go a week or more at a time without spending physical cash.  As for millions of people carrying their cell phones and smart phones, transmitting their identity and physical location at all times, while being recorded by ever present security cameras - that is already our world, particularly in places like London.

For this illustration / exploration of possible futures, we will assume that there will be a deadline date when all cash must be deposited and converted to electronic form, and after that date - any payment with cash that can't be electronically tracked will be a felony.  This would, of course, include any payment made with gold or silver as well, meaning spending a silver coin in a manner that didn't generate an electronic tracking report would be an automatic felony.

Oh, this final transition to 100% electronic (and 100% monitored) money will surely be presented as being in the interest of the nation and of all right-thinking people – make no mistake about it.  It will be presented as an essential element in the War against Drugs.  The drug dealers will have no way to take money in, or to spend money, when using cash itself becomes a felony offense.  Indeed, what will be the point of armed robbery when all you can do is transfer the money into your account with the government watching?  Why burglarize for resale, when every dime you take in is reported?  This will finally mean winning the War against Drugs, protecting our youth and Winning The War against Crime in general. 

Or so it will be presented.

It will be presented as a core element in the War against Tax Evasion By The Rich, as future austerity programs become nasty and the public is looking for scapegoats. To be clear, the government is unlikely to go after the truly powerful and extraordinarily politically connected people who are responsible for this mess, let's not be naive here.  (This is after all an article about plausible possible futures, not pure fantasy.)  However, with future austerity measures, everything from Social Security to Head Start, to programs that aid the homeless and the mentally ill, to public support for libraries and the arts, will be under assault and either slashed or discontinued altogether. 

Millions of people are going to see their view of the world under assault, they will be looking for people to blame - and culprits will be offered up to them.  It will be the fault of those greedy entrepreneurs abusing the system by hiding income in a way that a respectable-salaried corporate or government employee just can't do.  Or how about those rich old people all over the country trying to dodge taxes they could so easily pay, by bartering their gold coins?  Fairness for all will require 100% electronic money, as all politically correct-minded people will agree. 

Or so it will be presented.  

It will also be an essential component of the War against Terrorism.  Terrorists need guns, bullets and chemicals, as well as the ability to pay for food and housing.  They need connections once they are "in country", to tap into the financial resources they will need to pay for their terror.  Going to 100% electronic money means shining a spotlight into all the dark corners, and you cannot be a Patriot and oppose this most reasonable evolutionary step in the War for the Homeland.  

Or so it will be presented.

It will be an extraordinary loss of individual privacy and liberty in the US and the many other nations that either lead or follow.  It will not be any one of these factors by itself, but the combined result of the War on Drugs, the War on Crime, the War On Tax Evasion and the War on Terror.   And because of the enormous technological advances of recent decades, something that would have been paranoid science-fiction in the 1970s, can now be easily accomplished. Our future could make George Orwell's "1984" look like a naïve utopian fantasy in comparison to what modern technology permits a state when it comes to controlling its own citizenry.

If you are currently entrenched in power, there is a nice little "fringe benefit", in that every step which you take to ensure that no foreign terrorists can fight against you, is equally effective at keeping your own citizens from attempting to reclaim the liberty they will have lost at that point.  For some nations, this will be a "fringe benefit" that may be far from accidental.

What do you personally think is more likely given the deeply flawed world in which we live? Do you think the federal government will hand power back to its own people (whether it's the United States or other nations around the world)? Or do you think it is more likely that the unscrupulous people in power whose actions created this situation in the first place will use this as the pretext to seize still more power, and make it significantly more difficult for dissenting forces to challenge them?

This is truly a global question as we are seeing right now in Europe. The economic failures in Greece and Ireland may cascade quickly to Portugal, Spain and beyond.  Some people believe that these failures will reach the point where they can no longer be contained and this will lead to the collapse of the European Union.  They assume that because the politicians betrayed the economic interests of their own citizens, these politicians will be removed from power and maybe a different kind of experiment will be attempted so that the interests of the citizens are served.

Unfortunately, however, what we are seeing to date is just the reverse.  Political leaders who are dedicated to a centralized European government that is far more powerful than the current European Union are using the crisis to try to increase the political power of the European Union government. The rationale is that the euro is fatally flawed because the voters in individual nations may elect leaders who act irresponsibly and take actions that risk the wealth and economy of all of Europe.   Therefore it is in the interests of the citizens of the European Union for increased central power to be held by the European Union, so that individual nations can be brought into line and all Europeans can be protected from the irresponsible actions of their individual (elected) national governments. 

Or so it will be (and is) presented.

Unnecessarily Concentrating Risk

If you think the future is solely about money and gold, let me suggest that it is likely that you're going to turn out to be badly mistaken. Oh, it's not that those issues aren't vital, particularly in all of our individual day-to-day lives, but the stakes for what is happening far exceed money by itself or investments by themselves. There is an extraordinarily complex battle that has already begun, and it is becoming increasingly official with "QE2" and the results of the Seoul Summit, as well as the many other factors that are changing all around us.  Indeed, just this week Guido Mantega, the finance minister of Brazil, declared that a global currency war already exists, with US and China being the worst offenders, that Brazil was preparing countermoves, and that global trade war could be the result.   The results of this war could be devastating for investors and retirees around the world, as covered in my article Bullets In The Back:  How Boomers & Retirees Will Become Stimulus, Bailout & Currency War Casualties.

http://danielamerman.com/articles/Bullets.htm

We are seeing the beginning stages of a battle among power factions inside of a number of major nations (rioting on the streets of Athens, London, Paris and Rome are cases in point), and the outcome is both unknown, and at this point, unknowable. We're looking at a global political battle between nations,  global economic warfare between nations, the redistribution of power and wealth within nations, and possibly even military conflicts as well.

Let me suggest that for someone to take everything that they have built over the course of their life and to concentrate all of their wealth on just one strategy, based on their absolute conviction that they know the future (the solid stability of gold as currency) - then that person is unnecessarily concentrating their risk. If a person puts everything he or she has into one popular strategy, and is correct about the value of the dollar collapsing, and is also correct about gold soaring, but it turns out that gold itself does not become currency (which is distinctly different from a gold-backed currency) and tax rates grow ever higher, then that person risks the loss of most of what they have, as shown in Hidden Gold Taxes:  The Secret Weapon Of Bankrupt Governments.

http://danielamerman.com/articles/GoldTaxes1.htm

Unprecedented Diversification

When looking at this world of extraordinary complexity and unfairness, I find the best solution may be to return to a world of fairness and simplicity. I think back to the days when I was a Boy Scout and my motto was "Be Prepared".

When the future is uncertain, then the best strategy that you can possibly have on an individual level is to be prepared for multiple possible futures. To craft a strategy where you look at likely possibilities, and regardless of which possibility occurs, even if you don't necessarily gain great wealth, at the very least you are not completely wiped out by putting all of your eggs in one basket, into one strategy.

I like gold a lot as an investment during a time when the US government is openly monetizing, as in openly turning to direct monetary creation to fund extraordinary budget deficits.  I won't pretend to know for sure what the future holds, whether gold will be currency or whether cash will be illegal.  This article is intended to illustrate, educate and provoke.  That said, an important point is that I don't think anybody else knows for sure either.

In my opinion, the solution is to enter into a set of strategies with multiple components, with those components shifting at different points in time, with the different stages in crisis (as explained in my Gold Out-Of-The-Box DVDs). We should be comfortable that we have found individual solutions that give us a fighting chance, whether the future is one that we hope to see, or is a future that terrifies us.  Ideally, with multi-component strategies, even if the government sees and taxes you on every single penny of your gold profits, you'll still come out ahead, potentially even strongly ahead of where you are right now.

And if gold itself does become currency on a tax-free basis, then you do much, much better with these same strategies - because when none of your profits are consumed by covering taxes, everything can go into multiplying wealth.    It comes down to a goal of deliberately attempting to create a win-win situation. A situation where your wealth is protected, regardless of whether you're paying taxes on your gold investments, or you aren't.  If the future is in doubt in any way, and the stakes are everything you and your family have – why risk it all if you don't have to?.

Do you know how to Turn Inflation Into Wealth?   To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation – the more your after-inflation net worth grows?  Do you know how to achieve these gains on a long-term and tax-advantaged basis?  Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax?  So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth?  These are among the many topics covered in the free “Turning Inflation Into Wealth” Mini-Course.  Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings.  More information on the course is available at DanielAmerman.com or InflationIntoWealth.com .

Contact Information:

Daniel R. Amerman, CFA

Website: http://danielamerman.com/

E-mail:  mail@the-great-retirement-experiment.com

This article contains the ideas and opinions of the author.  It is a conceptual exploration of financial and general economic principles.  As with any financial discussion of the future, there cannot be any absolute certainty.  What this article does not contain is specific investment, legal, tax or any other form of professional advice.  If specific advice is needed, it should be sought from an appropriate professional.  Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.

Copyright 2011 by Daniel Amerman