Cyprus Reminds The World To Diversify Our Assets And Never Trust The Government
Imagine diligently saving $100,000 over 10 years only to wake up the next day to see $93,250 in your account. Now imagine having to fork over $99,000 of your $1,000,000 nest egg right before you plan to retire. The Cyprus president has basically negotiated a 6.75% tax on all deposits under €100,000 and a 9.9% tax above this amount in order to receive bailout money from the EU!
There are so many things wrong with this scenario:
* Trust of the government is now completely broken.
* The government is asking savers to foot the bill instead of spenders.
* The policy promotes moral hazard as any reasonable person will simply spend everything they have and wait to get bailed out by more fiscally responsible citizens.
* The media will capture images of bank run frenzies, causing more panic to spread to anybody who has access to a TV or internet connection.
* Citizens of weak EU countries like Portugal, Italy, and Greece may start withdrawing cash further hurting their economies.
* Equity risk premium rises causing a sell-off in stock markets overall which dampens returns, earnings, and corporate enthusiasm for spending and hiring.
HOW THE CYPRUS BANK RUN IS RELEVANT TO YOU
Big government is here to stay in America. Resistance is futile because you will be crushed by the majority if you step too far outside the boundaries of the middle class. You will be shamed by protesters and taxed to the point where you cry Uncle and no longer want to work. Always categorize yourself as middle class no matter how rich you are!
What the majority who support Big Government don’t realize is that their leaders will eventually turn on them as the Cypriot leaders did. 401ks and IRAs are the predominant vehicles the middle class use to save for retirement. I do encourage everyone to max out their pre-tax contributions. At the same time, I also encourage everyone to mentally write-off their 401ks and IRAs to ZERO.
The government can very easily raise the penalty-free distribution age of 59.5 or implement some type of exit tax when it’s time for you to collect. To voluntarily pay more taxes to a ROTH IRA upfront is silly. Maxing out your pre-tax retirement plans is NOT enough and why every single one of my net worth charts has a Post-Tax Savings column. Even with post-tax savings, I encourage everyone to not have much more than the FDIC guaranteed $250,000 per person or $500,000 per married couple at one bank. It’s easy to spread your money around. You’d be lazy not to.
SAVINGS UNDER YOUR MATTRESS
The sad part about Cyprus is that we now have to question the sanctity of the FDIC $250,000/$500,000 deposit guarantee. If not even cash is safe, what is? Savers have already been punished thank to a decline in interest rates. To get hit with a massive 6.75%-9.99% is unthinkable.
It’s important to understand that the financial system is vital to a working economy. Without banks, borrowing and lending cannot happen on the retail level or the large corporate level. Banks are also highly levered. No bank has all its deposits sitting in bank branches for their clients to withdraw. Deposits are largely already lent out and cannot be easily recalled. Once a bank run begins, the system collapses.
With cash being trashed, we need to remind ourselves to diversify into real assets. As I’ve written before, there is no better real asset than real estate thanks to the cash flow and utility it provides. Other real assets include precious metals and businesses that have tangible book values. Having 100% of your net worth in equities is unwise. Please diversify your net worth over time to stay protected.
DON’T WORRY TOO MUCH, YET
The great thing about bad policy is that if it negatively affects enough people, bad policy will not go through. Everything is rational when it comes to making money because everybody has some level of greed in their hearts. We’ve learned from the US Presidential election that we must pander to the middle class instead of the poor or wealthy to get votes. The proposed Cyprus policy attacks their middle class and wealthy, leaving the government no choice but to repeal the proposal and figure out some other way.
I’m staying on the sidelines eager to watch how things unfold. In the meantime, figure out ways to join a segment of the population where the government is showering the gifts of others onto you. If you cannot beat them, join them. Just make sure you sleep with one eye open and a knife under your pillow.
Comrades, why do you think people continue to vote for big government? Do citizens not understand big government ends up controlling all of us? What are some ways in which you are diversifying your wealth? Why do people continue to contribute to a ROTH IRA before maxing out their pre-tax retirement benefits? Kindness?
Photo: The things we find in Talin, Estonia, FS.