Matt Insley

Let’s start today’s issue with a quick joke, it’s a one-liner:

According to CNN Money “Any bank run at this point outside Cyprus seems unlikely.”

Ha! Unlikely? Yeah, about unlikely as the sun rising.

Without wasting another minute, let’s venture into the world of poor decisions. No, I don’t mean your editor’s St Patty’s Day weekend plans, but rather let’s head to the central bank-plagued Eurozone…

CNN Money’s audacity is akin to that of central bankers – both over estimate their grasp on a situation and highly under estimate the power of ripple effects in free-markets.

Frankly I don’t know which is worse.

On one hand you’ve got the guys that made the decision to boldly steal money from private citizen’s bank accounts, and assume there wouldn’t be any adverse effects.

And on the other hand you’ve got a news outlet saying it’s unlikely we’ll see a run on banks…at a time when banks are boldly stealing money. Who the hell would ever say that?! Ugh.

The worst is still yet to come, dear reader.

Today I want to cover a few of the ripple effects that this “heist” from Cyprus will bring – there’s an easy lesson in hard-money, too.

But before we get to the take-away for the day, let’s make sure we’re all on the same page. To get you caught up on the situation I want to share a long excerpt that our resident hard-money expert Byron King sent in yesterday:

Legal Bank Robbery

Long-time readers know I spend a lot of time banging the drum in favor of owning physical precious metals — gold, silver and platinum — if you can swing that. I’m generally down on the future prospects for most national currencies — the dollar, euro, yen, etc.

Long ago, true “money” was a coin made out of gold or silver. For lack of silver, in Sweden of 500 years ago, people used copper plates as money — they were heavy, but they worked. Back then, people took money seriously. Indeed, those old Swedes punished counterfeiters by melting down bad coins and pouring the molten metal down the throat of the perpetrator — which reduced recidivism to zero, to be sure.

Then came paper currency, which beat lugging heavy copper plates, I suppose. But today, the general class of politicians seems unable to let a good thing work — they just have to screw it up via overspending, borrowing and overall inflation.

Along those lines, this weekend, we witnessed a frightening harbinger of things to come, emanating from the tiny nation of Cyprus, an island in the eastern Mediterranean Sea. Cyprus is inhabited by a mix of Greeks and Turks, with lots of other (mostly European) expatriates living there, as well, due to the balmy climate and — up to now — wide-open economic arrangement.

Still, despite its physical attraction and cultural charm, Cyprus is a poorly managed place, with more government than the nation can afford. That is, there are too many bureaucrats, too much featherbedding in government employment, too much national debt and not enough productive capability to make it all work. Sort of like Detroit, if not Washington, D.C.

To make a long story short, Cyprus has been begging the European Union (EU) for a bailout. The EU bosses finally said OK, to the tune of 10 billion euros. But on top of the EU contribution, Cyprus has to kick in funds as well — 7 billion euros.

Where will the government of Cyprus get that kind of money? What did Willie Sutton say about why he robbed banks? “Because that’s where the money is.”

So with no prior warning, the Cyprus government declared a new “tax on wealth.” Basically, the government will collect its tax straight out of people’s bank accounts. For bank deposits up to 100,000 euros, the nick is 6.75%. Above 100,000 euros, the hit is 9.9%. The preliminary estimate is that this “legal” bank robbery will net the Cyprus government 5.8 billion euros.

Of course, there was no advance signal that this would happen, lest people would withdraw their funds and stuff the cash into mattresses. So in a bolt from the blue, the Cyprus government just dropped the hammer on Friday night, after the close of business.

Over the weekend, people lined up at ATMs all across Cyprus to remove funds. But the damage is done. The banks are on notice to place a hold on all accounts — for local residents, visitors and foreign account holders. Even British soldiers stationed in Cyprus for their training cycle are taking the hit.

Who else is getting nailed? Well, over the past 20 years or so since the end of the Cold War, Cyprus has become a haven for offshore cash — “hot money” — out of Russia. That is, the former KGB “oligarchs,” with their arms full of lucre, have stashed large amounts of cash in Cyprus. And according to one report I saw, up to 2 billion euros of the Cyprus “tax” — over one-third of the total haul — will come out of the collective hide of the oligarchs.

Something tells me that we have not seen the end of this mess. At the very least, I believe that we’ll see Russia — both its central bank and rich oligarchs — step up purchases of gold, versus depositing their cash in offshore banks. Other nations in which wealthy people tend to… umm… move money offshore will also likely step up their gold buying.

Furthermore, the actions of the government of Cyprus — all done at the behest of EU monetary managers — have that ringing sound of a hammer driving nails into the coffin of paper currencies everywhere. This new “tax on wealth” may morph into a monetary bridge too far.

In the U.S., we already know that the government can pretty much do whatever it wants, as long as it calls it a “tax” on something — we took that constitutional hit last year with the “Obamacare” decision of the Supreme Court.

What next? Where will this Cyprus precedent take us? More and more, it’s the government’s world and we just live here. No, we’re not subject to rule by the divine right of kings of old. But it seems like we’ve replaced the old kings with the divine right of “the government” to do what it wants, even if it represents the will of a mob.

There are two key takeaways to highlight from Byron’s note.

First, hard money is hard to come by these days. With central banks running amuck world-over, finding a secure currency to store your wealth is getting tricky. If you’ve got a nest egg, it’s like driving an armored truck through a minefield.

Second, you can’t trust the mob-run government or government controlled banks (which they just about all are these days!)

Think of it this way…

As the U.S. went through the meltdown of 2008 there were winners and losers – if you held shares of Bank of America or Goldman you likely made out alright after the bailouts. The same can’t be said for those that held Lehman’s stock.

There would have been absolutely no way to predict that outcome – heck ALL the big banks had toxin on their balance sheet. Simply put, the decision of which banks to save and which to trash came down to a government/boardroom meeting that you and I weren’t invited to.

Going forward, especially in the Eurozone, there are going to be plenty more of these closed door meetings. With that in mind it’s more important than ever to keep tabs on your wealth.

Indeed, holding paper currency in a bank aint what it used to be. As a countermeasure to government meddling and secretive bank moves, make sure you’ve got some of your wealth in tangible, hard assets. Along with precious metals, this also includes shares of your favorite mining and energy plays.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

Matt Insley

Matt Insley is the managing editor of The Daily Resource Hunter and now the co-editor of Real Wealth Trader and Outstanding Investments. Matt is the Agora Financial in-house specialist on commodities and natural resources. He holds a degree from the University of Maryland with a double major in Business and Environmental Economics. Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department. Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

  • Bruce Walker

    Eventually, everyone in the Euro-zone is going realize the Euro never was a multinational currency. All along it has been an imposter, pretending to be something it isn’t and can never be. The Euro, all of the rhetoric aside, is really nothing more than the German Mark in disguise. And as more and more of the Euro-zone countries outside of Germany have austerity plans crammed down their throats, eventually everyone in Europe will realize this. They will also notice, after all these years, that a map of the Euro-zone very much resembles Nazi Germany at the height of it’s conquest. When it finally dawns on all these people that the Germans have accomplished with their bankers what they failed to accomplish with their Panzers, all hell is likely to break loose in the Euro-zone. And it will start with attacks being launched on German embassies through-out Europe.

  • lukejdavis

    Just to let you know Australia is the world leader in legalised theft. Cypriots are pussies, a once off 10% Levy – hahaha, they aren’t even trying. We australians have a permenent 100% levy
    http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r4921

    The OZ govt plans to make 5bil a year off this.

    Quote from the Explanatory Memorandum
    “… increase to $2000 the balance threshold below which small lost accounts are required to be transferred to the Commissioner of Taxation. …”
    Yes thats right if we forget to look at our accounts once every three years we forfeight it to the Australian Government, this includes our superannuation accounts.
    And the Australian public didn’t even blink.

  • waffenss

    the same pieces of shit making the decision in Cypress are the same pieces of shit making “boardroom decisions” here in America, as witnessed by the above article. ie. Lehman et. al.

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