The State Of The State: How Mexico’s New Currency Control Laws Will Backfire
August 15, 2013 by The Dollar Vigilante
[Editor’s Note: The following post is by The Dollar Vigilante legal correspondent Jim Karger and TDV Acapulco group moderator James Guzman. Nothing herein should be construed as legal advice. Consult a qualified attorney regarding your particular situation.]
Everyone we know who has chosen Mexico as a place to flee the police states of the United States and Canada utters one common theme: “I will never go back.” Yes, it really is that much better here. Government in Mexico exists, to be sure; but it has been slow to acquire the desire and sophistication to put its boot heel on the neck of its citizens.
Yet, as Mexico becomes more First World, so has its government. While light years behind the USSA in intrusiveness, Mexico is following briskly in the footsteps of its northern neighbor.
Just a couple of weeks ago in the gym where we work out in San Miguel de Allende, a member got sideways with the club over fees. Rather than work it out or just take his business elsewhere he went to government and complained about “code violations.” This retaliation resulted in city officials inspecting and ultimately threatening the club’s ownership with fines and worse — all resulting in at least one employee being fired (i.e., sacrificed), and the club shut down for two consecutive Saturdays ostensibly to “retrain” its employees. That kind of in-your-face use of government as a personal weapon was unheard of here five years ago. Five years ago, he would have just taken his business elsewhere.
And Mexico is not alone among emerging states following the path of bigger and more intrusive. TDVer and Managing Partner of Galt’s Gulch Chile Ken Johnson learned the hard way the same lesson recently when trying to travel from Paraguay to Chile. He has made the trip many times. But this time, the airline agent pulled out a book and pointed to a clause that says if a passenger can’t show a Chilean ID card, doesn’t have a return ticket out of Chile or doesn’t have the money on him to buy a ticket to return, he can’t enter. [Editor's Note: TDV Editor-In-Chief Jeff Berwick regularly prints up a fake "onward" ticket because this has happened to him dozens of times around the world.] Ken scrambled and got back to Santiago, but not without a grim reminder: “We are the state. We control you.”
Here in Mexico, the government continues to wage war with the drug cartels at the behest of — or more likely a threat by — the United States. Absolutely ineffective in curtailing the flow of drugs into the United States, Mexico has taken a different tact: Control the U.S. dollars coming back into Mexico from the sales of those drugs – specifically, making it difficult, if not impossible, to use U.S. dollars or to convert them to spendable Mexican pesos. Net-net: The war on drugs has transmogrified into the war on cash with significant collateral damage.
Mexico’s recent currency controls are nothing new. Governments always militate to complete control. Because one half of every commercial transaction is money, the easiest way for any government to control its population is to control its money. By specifically limiting what transactions can be made in cash, government gets control as well as its cut (or “mordida,” as we call it here in Mexico). To those ends, Italy recently banned cash transactions over €1,000 and Spain prohibited transactions over €2,500.
The United States, likewise, has been trying to stamp out cash transactions, using a more incremental approach, i.e., requiring banks to report customers who present more than $10,000 in currency or engage in undefined “suspicious transactions.” To learn more, watch this video in which Professor Joseph Salerno breaks down the hidden war central planners have been waging on the free markets for decades:
Various States are getting into the act, too. Louisiana, for example, passed a law making it illegal for consumers to pay for secondhand goods with cash, fearing there might be a lost sales tax dollar.
Every government needs a bogeyman to justify breathless tirades and resulting regulation. And in Mexico, the bogeymen are the drug cartels, which have ironically been created by the U.S. government’s immoral and unnecessary war on drugs.
In response, effective Sept. 14, 2010, Mexico capped the amount of dollars foreigners can exchange for pesos in banks and money exchange establishments to no more than $1,500 U.S. dollars per month. Until recently, the law has been mostly ignored, but no more. The government has notified banks and businesses they will be held accountable if they violate the law. And recently, banks here have instituted tighter controls, with several financial institutions limiting exchange up to $300 U.S. dollars in a single transaction, and others refusing to accept or exchange U.S. dollars in any amount without prior government approval.
Last year, the Mexican government went even further, limiting the use of cash in real estate transactions. Indeed, cash payments of more than a half million pesos ($38,750 U.S. dollars) for real estate are now forbidden; and cash payments for automobiles, planes, boats, jewelry, precious metals, watches, precious stones, artwork, gambling tickets, lottery tickets, raffle tickets, payment of related prizes, transfer of shares or equity for more than 200,000 pesos ($15,500 U.S. dollars) are likewise forbidden. The law carries a minimum penalty of five years in prison and a fine of 4,051,450 pesos ($316,000 U.S. dollars) or 10 percent of the prohibited transaction, whichever is greatest.
Businesses — e.g., restaurants, bars, hotels and retail stores — may now accept a maximum of $100 U.S. dollars in cash per transaction, with no restriction on the number of transactions per customer. However, many businesses have begun refusing accept U.S. dollars at all. After all, what are they to do with U.S. dollars if their banks will not accept them in quantity?
Finally, the new law also requires notaries, real estate brokers and other dealers to report to government, specifically Mexico’s federal tax authority, the forms of payment for transactions above specified limits. Financial institutions will be required to report monthly credit card balances in excess of 50,000 pesos ($3,875). This provision was technically enforceable June 17, 2013, but the rules and regulations have not yet been published. Our lawyer in Mexico who specializes in business and real estate transactions advises us that we should expect it to be in full effect with all rules in place as soon as October of this year. In the meantime, banks have begun clamping down on receiving U.S. dollars in excess of that permitted by law. Notarios in Mexico — quasi-government officials who supervise and approve most sales transactions of size — will likewise fully comply, giving the Mexican Internal Revenue Service (Hacienda) open season on all taxable transactions, many of which have gone unnoticed under former law.
What does it all mean going forward? Like most things fomented by the state, the cure may prove worse than the disease, to-wit:
- Mexico’s attempt to stamp the U.S. dollar out of existence in Mexico will likely result in the rise of U.S. dollars as a secondary currency that is never converted to pesos, just as dollars in the United States are rarely converted into a real currency — e.g., gold, silver and bitcoin. Mexico fails to recognize that all fiat currencies are lies agreed upon and that it doesn’t matter who printed the paper or what color it is. It works as long as people agree to accept it in exchange for goods and services.
- Other currencies like bitcoin may take hold, replacing both the peso and the dollar.
- Gold and silver, long secondary currencies in Mexico, will become more prevalent in commercial transactions.
- Giant banks will continue to launder money for anyone and everyone because the penalties, if any, for doing so will fall woefully short of discouraging the unwanted conduct.
Bottom line: States are states. States do what states do: attempt to control and tax all those within their borders; and, in doing so, they fail to heed Frederic Bastiat’s inviolable dichotomy of the seen versus the unseen. Mexico is not different. Indeed, currency controls are just one step being taken to make the rich richer and to empower the state. At the same time Mexico is implementing these controls, it is planning to boost its tax coffers by an extra $50 billion a year by extending sales tax coverage to food and medicine and by starting to tax capital gains. Terrorist chatter continues that the next step in governments’ control sequence will be a combined currency among the United States, Mexico and Canada.
But this effort by the statists to kill the cash market in Mexico will fail. On the contrary, the cash market for goods and services will be expanded due to these government incursions. As discussed above, more, not fewer, transactions will take place in pesos, gold, bitcoin and even U.S. dollars that will never see the inside of a bank and will remain unknown, unrecorded and untaxed. The Mexican people have long been innovative and resilient when it comes to defeating government intrusion into their lives. We may be unsure of every avenue they will use to avoid this latest attempt by government to interfere, regulate and control their lives and their money; but we are comfortable they will succeed.
If you live in Mexico, just be sure to keep the majority of your assets well outside of Mexico and well beyond their capability to find. Contact TDV Offshore for more on that. And, preferably, like Berwick, don’t become resident if you live there. Be a tourist. Get a second residency and passport in some backwater country where they are years from these kind of transgressions.
We often give the United States and all Western governments the bird. Mexico is still infinitely freer and safer than the northernlands of North America but now we must also address the Mexican government: Chinga tu madre, criminales!
–Jim Karger and James Guzman
Jim Karger is a lawyer and frequent contributor to The Dollar Vigilante. He has represented American businesses against incursions by government and labor unions for 30 years. In 2001, he left Dallas and moved to San Miguel de Allende in the high desert of central Mexico where he sought and found a freer and simpler life for him and his wife, Kelly, and their 10 dogs. He is TDV’s San Miguel de Allende concierge and his website is found at www.crediblyconnect.com.
James Guzman is TDV’s Acapulco group moderator and an anarcho-capitalist. He manages AcaCondos and Las Torres Gemelas Private Suites (www.LTGPS.com). He also helps TDVers with other property needs in Acapulco and pretty much anything else you can think of.