The  Cyprus  Bank  Deposit  Confisca5on:  Is  Your  Money  Safe  Anywhere?  

May  9,  2013  Professor  Lew  Spellman  

www.TheSpellmanReport.com    

SPEAKER SERIES

Visions  of  the  Columbia  Space  ShuMle  

Can  It  Happen  to  an  Economic-­‐Financial  System?  

•  Typically  not  vulnerable  to  a  cyclical  event  becoming  a  meltdown  

•  Natural  Dynamic  Equilibrium  Self  Correc5ons  –  usually  via  prices  

•  Policy  Correc5ons  mainly  fiscal  and  monetary  policy  

•  Monetary  Policy  is  Discre5onary  and  frequently  changed  

•  Analog  computer  simula5ons  

Policy  Can  Destabilize  an  Economy  

•  Economic  systems  inherently  more  resilient  to  shocks  (than  space  craZ,  but  economies  do  “crash”    (Dynamic  Instability)  

•  Europe  does  not  allow  wages  to  fall  or  the  currency  to  cheapen  so  Greece  and  Spain  have  no  natural  correc5on  

•  Fiscal  Expansion  or  Austerity?    •  Zero  Interest  Rate  Policy  is  a  destabilizer  

Why  and  How  Did  the  US  Become  Vulnerable?    

•  Why:  50  years  of  sustained  growth  created  a  sense  of  perpetual  growth    

•  Led  to  “Shared  Prosperity”(En5tlements)  •  Financial  Guarantees  Thought  to  be  Costless  Subsidy  •  Too  much  debt  to  date  

–  Past  the  “R&R”  “Bang  point”    (seeng  off  the  downward  dynamic  process)  

•  Far,  too  much  commiMed  government  spending,  mostly  en5tlements  over  the  next  40  years  implies  more  debt  

•  Demographics  hurt  badly  •  Poli5cal  Process  Didn’t  Want  to  Know  How  Much  it  all  Cost    

Tax  Revenues  vs.  Debt  Last  6  years   7 Trillion 6 Trillion 5 Trillion 4 Trillion 3 Trillion 2 Trillion 1 Trillion 100 Billion US Growth in Tax Collections US Increase in Debt Over 6 Yrs. = >$100 Billion Over 6 Yrs. = >$7 Trillion

US  Deficits  and  the  Growth  of  Debt  

Interest  Cost  of  Large  Scale  Deficits  as  a  percent  of  GDP  

When  an  Economy  “Crashes”  What  Happens?  

•  Government  Default  on  its  debt  •  Financial  Prices  Crash  •  Banks  Fails  •  Capital  flight  •  Unemployment/Bankruptcies  •  AZer  geeng  through  na5onwide  bankruptcies  •  All  resources  now  cheap,  currency  cheap,  liMle  debt:  Start  again  

This  is  Not  Uncommon  

•  Mexico:  1983,  1994  •  Argen5na  today  (has  not  reached  boMom)  •  Asian  Contagion:  1997  •  Russia:  1998  •  Greece:  2011  •  Iceland:  2010  •  US:  We  are  extremely  vulnerable  and  not  exempt  

How  Does  Treasury  Sell  Risky  Debt  

•  Cram  it  down  the  throat  of  the  financial  ins5tu5ons  via  regula5on  or  incen5ves  – Banks  –  Insurance  Companies  – Pension  Funds  – Money  Market  Mutuals  – Hedge  Funds  

Laying-­‐off  the  Debt  on  Central  Banks  

•  Central  Banks  “large  scale  asset  purchases”  beMer  known  as  Quan5ta5ve  Easing  (QE)  

•  Fed,  ECB,  Bank  of  Japan  all  doing  it  •  Paying  for  it  with  money  or  claims  on  money  •  While  they  claim  it  is  a  cyclical  economic  policy,  it’s  a  secular  debt  

support  policy  •  Induces  Other  Central  Banks  of  the  World  to  do  the  same  via  the  2-­‐

part  process  called  “Currency  Wars”  –  Limit  the  apprecia5on  of  their  currency  by  selling  their  currency  

against  the  dollar    –  Keep  on  Expor5ng  to  the  US  (run  trade  surpluses)  –  Buy  Treasuries  with  the  dollars  so  US  doesn’t  impose  trade  sanc5ons  –  Last  year  $555B  of  the  $1.2  Trillion  was  Foreign  Official  purchases    

Now  Its  Your  Turn:  Government  Debt  Crammed  onto  Your  Balance  Sheet  

•  Proposals  for  the  Government  to  take  over  or  manage  your  IRA  or  401k  account  (State  of  the  Union)  

•  “Guaranteed  Re5rement  Accounts”  Two  versions,  turn  in  your  IRA  or  supplement  it    

•  Now  CFPB  is  seeking  to  “protect”  consumers  by  managing  your  investments  to  “safe”  Treasuries  

•  Read  The  Feds  Want  Your  Re5rement  Accounts  •  Its  actually  easy  for  the  US  to  tax  your  IRA  by  changing  the  amor5za5on  schedule  by  which  it  is  taxed  

Conclusion:  Government  Debt  Problems  Become  a  Private  Wealth  

Tax  •  Your  “bank”  (insurance  co.  etc.)  assets  go  down  and  banks  goes  down  and  the  government  financial  guarantee  can’t  be  fully  honored    

•  Currency  falls  in  value  (Bill  Gross:  Sell  Currencies  of  Serial  QE  Offenders)  

•  Infla5on  depreciates  the  value  of  fixed  income  assets  

•  Wealth  Confisca5on  (Bill  Gross,  Haircuts)  •  Explicit  One-­‐Time  Wealth  Tax  26%  (BCG)  

Another  Stealth  Tax  •  Financial  Repression  =  Very  low  market  rates  and  posi5ve  

infla5on    •  Lowers  real  cost  of  carrying  debt  for  the  gov’t  debt  issuer  at  

the  expense  of  the  holder  •  No  compensa5on  in  yield  for  the  risk  of  default  or  generally  

rising  yields  due  to  infla5on  or  end  of  QE  •  Major  loss  of  the  market  value  of  government  bonds  if  

interest  rates  rise    •  Ten  year  Treasury  bonds  decline  31%  in  market  value  if  

market  yields  climb  to  normal  5%  •  All  ins5tu5ons  hold  debt  whether  government  or  private  

and  are  affected  and  many  prospec5ve  re5rees  hold  them  for  “safety”  

Treasury  Nominal  and  Real  Yields  Not  Enough  Return  to  cover  the  risk  of  

falling  market  prices  or  infla5on  

All  5me  low  yields  with  lots  of  risk  

How  Cyprus  Bank  Depositors  Went  Down  

•  Banks  bought  “safe”  Euro  Zone  government  bonds  •  When  Greece  Defaulted,  assets  declined  below  deposits  and  other  debt:  This  is  

insolvency  (more  debt  than  assets)  •  Cyprus  had  commiMed  to  recapitalize  banks  •  Needed  Rich  Uncle  assistance,  but  Germany  and  the  Dutch  decided  enough  was  

enough  •  Bank  Regula5on  requires  solvency  and  without  it  liquida5on  follows  •  In  Bankruptcy,  assets  are  liquidated  to  pay  off  claimants  in  order  of  priority  •  Government  could  NOT  make  good  on  deposit  insurance  to  cover  depositor  losses  •  Deposits,  what  were  leZ  had  a  capital  ouwlow  restric5on  (from  bank  and  country)  •  Tossed  out  Rule  of  Law  since  the  1930s  order  on  order  of  priority  •  The  new  “template”  Its  now  buyer  beware  •  Is  the  FDIC  any  beMer  prepared  

Geopoli5cal  Reac5ons  

•  Countries  Will  Seek  to  Insulate  Themselves  – Germany  Will  No  Longer  Be  the  Rich  Uncle  of  Europe-­‐there  will  be  separa5on  (drop  out  of  Euro  party  gaining  trac5on)  

– Foreign  Central  Banks  are  not  so  eager  to  support  US  Treasuries-­‐switching  to  suppor5ng  their  own  equity  markets  

– BRIC  Countries  seeng  up  their  own  payments  systems  to  avoid  holding  the  dollar  

 

The  Geopoli5cal  Opportunity:  Capital  Safe  Haven  at  a  Price  

•  Countries  Lining  Up  to  be  friendly  to  foreign  flight  capital  

•  Safe  haven  countries  can  charge  for  being  the  safe  haven  (the  Brazilian  2%  capital  inflow  tax)  which  improves  their  fiscal  picture  

•  Switzerland  losing  ground  to  Singapore  •  China  gold  accumula5on  and  transac5on  currency  agreements  likely  leading  to  a  world  reserve  currency  that  is  gold  backed  

•  Canada  and/or  Australia  but  at  the  cost  of  trade  

Texas  State  Gold  Depository    •  Both  a  haven  and  in  a  wealth  form  that  stands  up  to  sovereign  default  and  infla5on  

•  Individually  owned  gold  stored  at  a  cost  held  in  the  name  of  the  state.    A  Texas  source  of  revenue    (my  guess  it  will  bear  2%  fee  per  year).  

•  Cons5tu5onal  protec5on  from  US  confisca5on  •  State  Guarantee  makes  it  a  beMer  product  than  private  depositories  

•  Will  Lead  to  a  Global  Wealth  Preserva5on  Industry  in  Texas  

•  Did  someone  say  the  “S”  word?  

Individual  Protec5ons  Being  Devised  

•  Off  shore  trusts  •  Swiss  Annuity  type  products  – Taxable.  but  Tax  Friendly  

•  Seek  Managers,  Lawyers,  Financial  Planners  ,  and  Tax  Advisors  who  understand  global  risks  presented  by  government  financial  strains  

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