Cyprus Reminds The World To Diversify Our Assets And Never Trust The Government

Funny Bathroom SignImagine 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.

Regards,

Sam

 

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Untemplater says

    That is crazy what they’ve proposed in Cyprus. I would be furious if they ever tried to pull something like that here. People would freak out and everyone would make a run to get their money out. Holding cash is already bad enough with interest rates at 0.1%. It sets a bad example to punish those who are trying to save money. We’ve seen what happens when people start overspending and bury themselves in debt.

    • Financial Samurai says

      Furious is the right word. The proposal sounds so draconian that I cannot imagine it going through.

      People think there will be riots on the streets….. however, I’m not sure if those who have been diligently saving are the ones who riot.

    • JayCeezy says

      As I look at my investing track record, I would be satisfied with a -9.9% return.:-)

      Wouldn’t it be interesting, if a year from now Cyprus (and the PIIGS) were out of the Euro anyway?

      • Mini-Machiavelli says

        JayCeezy: Here in Ireland, you hear people moaning about Europe all the time but there is no chance that we will leave over the current problems. People don’t realise we are still, after 40 years, net beneficiaries of EU funds. I can’t speak for the rest of the “PIIGS” but Ireland is going nowhere fast.

  2. Money Beagle says

    Every time government expands some program it becomes all but impossible to ever contract the spending that goes along with that. It’s largely the reason that spending has gone so far up so fast and why any talk of spending cuts is largely a joke.

  3. Ben says

    This Cyprus thing is crazy. I do agree that it makes you take pause to realize what the gov’t could do if they had to. But this case actually involves Russian millionaires who kept their cash in Cyprus and the Germans couldn’t be seen bailing them out. It sucks for their citizens though.

    • Paul N says

      And what… Is that justification for a low wage earner squirreling away his money for 10-20 years to get caught in the crossfire? That’s ludicrous. Friday morning my cash would be out sitting in a safe deposit box. Since I may lose 10% anyway I might consider moving all my assets out of the country just to spite them. If my cost is 10% to do that then I lose my way not someone else’s way. I would only put what’s needed to pay my bills in the local account. Every citizen there should do that. Watch how fast this theft then gets repealed.

  4. Kevin @ RewardBoost says

    I’ve been saying for a long time that people need to consider holding precious metals in their homes. The government can’t come and take that away unless they show up to your house with guns.

    Wealth you can touch (precious metals, real estate, etc.) is incredibly valuable in a world where the government can print all the money they want.

    • PK says

      If you hold it at your house, what’s to stop people who aren’t from the government taking it from you, perhaps with guns?

        • Winston says

          So you stay at home all of the time? Most home burglaries occur when the occupants are away. If they’re smart enough to find what I assume is a well-hidden/secured stash, then they are smart enough to case the joint and wait until you’re gone.

  5. My Financial Independence Journey says

    The only good thing about the Cyprus fiasco is that it should knock a few points off the overvalued stock market making stocks a bit better valued.

    Real assets may look appealing now, but if people like economist and policy wonk (and possibly closet communist) Daniel Atlman has his druthers and we institute a wealth tax, your real estate and my stock portfolio are all as good as dead.

    • JayCeezy says

      MFIJ, this is an interesting concept. I first read about it in Dr. Ravi Batra’s book “The Coming Great Depression of 1990″ (published in 1998). The argument for the ‘wealth tax’ is that the people who have done well and accumulated wealth in the existing social/economic/govt system have the most to gain from continuing the system.

      It is always good to know one’s opponents’ arguments, so that one can argue or counter against.

      This happened in Cyprus simply because depositers are the only target. If they were not in the EU, the currency would be devalued. Bad times ahead, like a relationship where one is a saver and one is a spender. The breakup is coming, but nobody wants to give up on the ideal and admit failure.:-)

  6. JayCeezy says

    FS, great pic, always funny! I cannot even find Cyprus on a map, but I will tally this move along with Ireland’s tax on private pensions in 2011, Argentina’s seizure of private 401(k) holdings to shore up their S.S. system, and the concept of a “one-time” tax on 401(k)s in the U.S. has been discussed in theory for 20 years.

    One thing about real estate to point out: the government can tax it. Any way they can get away with. And if one doesn’t pay, then the government takes recourse. Hmmm.

    My own thought on why people continue to vote for ‘big government’ is that 47% don’t pay Federal income taxes (come on, you know what I mean). And by far, most people take far more than they contribute to government. So for a one-person/one-vote system, your description of how this is relevant to us is something I read twice. Thanks for the analysis, and I will be thinking about the significance of this event in a little place I cannot even find on a map. Also, kudos on cranking out this thoughtful analysis so quickly, that could not have been easy.

  7. John S @ Frugal Rules says

    This is indeed crazy and if I lived in Cyprus I’d likely find myself arrested by the end of the day. We wonder why people don’t like big government, this basically boils down to theft on the part of the Cyprus government. Great point about the moral hazard Sam! All too often, I think many institutions either do not think about that or simply do not care. I am not certain why we keep voting for a big government, it’s just insane. Speaking personally, I believe only one person I voted for in the last election got elected and they were a local official.

  8. Laura says

    “Readers, why do people continue to vote for big government when there are so many examples of government abuse? Or, do you think people realize big government is bad but just don’t think they’ll get hurt?”

    You might as well come right out and ask “Readers, why doesn’t everyone think exactly the same way I do and value exactly the same things?”

      • Comrade Laura says

        Ok, I’ll bite. In a nutshell:

        Government’s an imperfect system, but so is pretty much any other system. Cyprus has only even been a country since 1960; events like those in Cyprus are extremely unlikely to happen in the US, which is far more stable and established (yes, things like the fiscal cliff raise questions about the US’ stability – but that’s still a far cry from Cyprus).

        And I believe that the government has a responsibility to provide for all of its citizens, which is why I support big government. Inefficient? Imperfect? Sure, but government provides basic human rights that I don’t believe would be fulfilled by the free market if government size were reduced.

        • John says

          i can agree with some of what you said, but no way can i agree with “the government has a responsibility to provide for all of its citizens?” where did this idea come from? the job of the goverment is to govern the citizens. if a group of people in office could in fact “provide” for all of us, that would be great. the problem is they use thier power to have some (workers) provide for others (lazy). this is not always the case…(not everyone is lazy), but our current governement is making it more beneficial to be lazy than work. this is a major problem and things get done by working and at some point, you will have too many people being supported by too few people. not only is this unjust, but not what our county was founded on.

        • Financial Samurai says

          Comrade Laura,

          I agree with you. Would you be willing to pay 10% more taxes or see your savings account get reduced by 10% to help pay for basic human rights that need to be provided for by the government? If not, any ideas on a better way to pillage those who save in a manner that won’t cause alarm?
          Comrade Sam

        • greg says

          “events like those in Cyprus are extremely unlikely to happen in the US” – of course the folks in Cyprus said that could only happen in undeveloped countries like Pakistan.

          “Inefficient? Imperfect? Sure” – then why support it? If you say “inefficient” you have something with which you are comparing it. Why not pick the better option?

          “I believe that the government has a responsibility to provide for all of its citizens” – well I don’t.

          @Sam – something for nothing is very attractive. Getting people to realize the consequences of acting as if one can ever do that is **very** hard.

  9. Matthew says

    “Readers, why do you think people continue to vote for big government? Do citizens not understand big government ends up controlling all of us?”

    Well, this was a bail-out of the Cyprus financial system, not the government per se (unlike, say, Greece). And it’s not like the parliament in Cyprus wants this, given that they are pushing the bank holiday out until Thursday to try and wrangle up the votes, the pressure for this is coming from the ECB. I doubt that, if Cyprus had a much smaller government before this, that the situation would be much different.

    So, if They are going to Get Theirs regardless when push comes to shove, why not make sure You get Yours while you can?

    • Financial Samurai says

      It really does seem like it’s all about getting yours while you got it b/c if you don’t, someone else will. I suspect the USD will strengthen over the summer as Europeans get the hell out of Europe and into USA assets.

      Come buy our property foreigners and make us RICH!

  10. Melinda Gonzalez says

    Hmmm, I have been tracking this whole Cyprus thing and it is pretty crazy. Who would have thought in this modern age banks could get away with this, even on a little island.

    Not to sound crazy, but I sometimes wonder if they are testing the waters (especially since they chose a small island). It’s like their testing humans to see how the common folk will respond to something like this. That way they know what to expect in other places. I might be crazy, but it’s just a thought.

    I still think this is only the beginning. I don’t think we should idly stand by and think we are safe. Many people stood by right before large tragic human events, thinking “it will never happen here”. I don’t think we should worry too much, because we cannot change some things, but we can slowly prepare ourselves.

    I did read that they might change the percentages, and make the percentage higher for those with over 100,000 (12.9 percent) and lower for those with less (3.5 percent). Either way, it’s just plain wrong.

    • Financial Samurai says

      I don’t think you are crazy at all. This is EXACTLY how the EU leaders are thinking. Test on Cypress first, see how the world reacts and roll out the program to bigger programs.

      The US markets are relatively flat on the news, whereas Europe is down marginally. This gives the EU MORE confidence to implement austerity measures.

      Then again, perhaps the reason why the markets are reating fine is b/c investors know there is no way such Cypriotic measures will be enacted.

    • Bret @ Hope to Prosper says

      I don’t think it’s crazy either. I think it was purposefull. Not only do I believe the ECB used Cyprus as a test country, I believe they are sending a message to the other PIIGS countries. So far, Greece and other countries have been asking for bailout after bailout, without any effective reform. If the ECB (and other creditor nations) can demand private deposits in exchange for a bailout, that changes everything.

  11. krantcents says

    Unfortunately, too many people do not vote! A 40% or 50% turn out is considered pretty good. Big government is much more than the President and Congressman. I think the Mayor and Governor are pretty important too. There are a slew of other state positions including legislators who seem to want to keep taking from people too. I am not suggesting a conspiracy, but an informed active electorate may stop a lot of this abuse.

    • greg says

      “an informed active electorate” – good luck finding an informed one … until you do, an active one hurts more than helps.

  12. No Name Guy says

    Well, this already happened here in Amerika: Cough, cough…GM Bondholders….cough, cough….UAW before bondholders…..cough, cough.

  13. Dan says

    I agree that the settlement reached in Cyprus is outrageous, not least because of the way the government has effectively sidestepped its previous commitment (and legal obligation) to guarantee depositors. However, I feel compelled to share some additional views (including some counter arguments to the points Sam has made):
    - Wider lessons should not be drawn from the agreement reached in Cyprus. The agreement was peculiar to the politics of Germany and the perception that a bail-out would in effect be a bail-out of Russian money launderers. For this reason, the malaise of abandoning the European deposit guarantee shouldn’t spread panic to the PIIGS (Portugal, Italy, Ireland, Greece, Spain), though this doesn’t mean that it won’t.
    - It is arguably ethically fair for depositors to bail in banks provided they are treated at least pari passu with unsecured bondholders and any previous commitment to guarantee their deposits are upheld. The greatest unfairness of Cyprus is that unsecured bondholders are not receiving an at least equal haircut (the fact that they do not make up a significant portion of Cypriot bank funding should be dismissed). Depositors realise that they are exposing themselves to a bank’s credit (even if they choose to ignore this fact most of the time) otherwise ‘bank runs’ would never occur.
    - This highlights the need for ‘living wills’ legislation to come into force sooner rather than later. A living will allows the relative haircuts of a bail-in to be assessed for fairness in advance of the credit event and (potentially) absent the prevailing political will. The living will of a US/UK/German/French bank is likely to involve: full (or close to full) haircut for equity (including Tier 1 and Tier 2 capital) investors, some haircut for unsecured bondholders, smaller haircut for depositors (and such haircut only applying above deposit guarantee limit).

  14. Simply Rich Life says

    I think Cyprus gained a lot from this. I’m not sure about the details but if it came to this I’m guessing they were facing some serious trouble, possibly even a depression if they weren’t rescued. They might have had a real run on banks too, ruining many depositors. For a small one-time cost they get to live off of the countries that saved and prepared!

    If you’re speeding towards a cement wall at 200mph you don’t complain about the policeman who pulls you over and gives you a ticket.

  15. The First Million is the Hardest says

    Should the people of Cyprus be outraged at the government over this tax for the bailout? Or should they be outraged at the government for letting their economy get taken over by an out of control financial system?

    A lot of the time these little island nations like Cyprus become popular tax havens and see their financial industry boom due to the lack of regulation and lack of government control. Using this situation to say “see! see! it could happen here!” is a bit of a stretch IMO.

  16. Mike says

    Yes, this is simply unbelievable. Live-in-a-shack-writing-manifestos me worries that we are on a similar path in the US. The moral hazard is tremendous. The US is already crushing savers with monetary policy. Plus, add the moral hazard with mortgage buyouts, bank bailouts, out-of-control spending, etc., and I worry…

  17. J says

    All I know is I’m done with doing the “right” thing.

    I did the right thing by creating a 6 month contingency fund which is getting devalued to the tune of $85B of new money per month.

    I did the right thing by putting my money in the bank, where not only do I get no interest, it’s now considered fair game by governments around the world.

    I did the right thing by investing in my IRA and 401k, and am trapped in the ever-inflating, ever riskier, stock market unless I pay early withdrawal penalties or the headaches associated with switching to a self-directed IRA.

    I did the right thing by putting down 20% on my home, and get to watch others negotiate their mortgages down or “strategically default” because they bought at the latest peak.

    I do the right thing by continuing to support Social Security and Medicare (not much of a choice, there) knowing that the odds of my ever receiving a cent of that back are slim.

    I’m sick and tired of being screwed by our government and our financial system for doing the “right” thing. I used to think it was the smart thing. Now I see my actions matter little compared to the overwhelming tide of mass America.

    The current course is unsustainable, and the end is going to be ugly when it comes. I used to think people talking about the “4 G”s (guns, grub, ground, gold) were crazy, now they’re looking like the smart ones.

    Anyone seen the movie Idiocracy lately?

    • Financial Samurai says

      J, it’s wrong to do the right thing. The right thing is to get yours while you can. You can never fight the majority.

      With the Cyprus parliament rejecting the EU proposal, the market is now rebounding aggressively. Russia is coming in to bailout the banking system and protect its tax haven.

  18. Crazyworld says

    And who has benefitted the most over the last so many years? Are the poor ( in other words lazy, according to current wisdom) just swimming in cash? Show me where, because i would like to get poor and lazy and become one with the 47% asap. *end sarcasm*
    Almost all of us, in big or small ways, are not much better than we were xx years ago. The world’s riches belong to a select few and the rest of us are now pointing fingers at each other for stealing. Nice.

    • Financial Samurai says

      The world’s richest are the top 0.01%. The top 1% are our doctors who spent 8 years after high school and another 3 years in residency studying and practicing their asses off to help make life better for others.

      Crazy world indeed how one is pitted against another CONSTANTLY nowadays.

      • Crazyworld says

        So are you saying all poor people are lazy and sit at home waiting for their next govt paycheck to come in? Or am i just not following you here? Do farmers work hard? Janitors? Only doctors work their asses off? How about nurses?
        Nitpicking aside, govt seems to be of the 1%, for the 1% etc. (and pick your favorite percentage). My point is, the word seems to be that there are moochers and I feel that is unfair. Sure there are some, there are bound to be-human nature etc. i am also saying that all those lobbyists in DC are not working for the financial benefit of the poor or even middle class.

        • Financial Samurai says

          Not at all. I hope you don’t think that way about poor people. Instead, try and help your brothers and sisters by donating your time and money, paying lots of taxes, and even writing a blog to help others financially.

  19. charles@gettingarichlife.com says

    Sam,
    Diversifying into real estate also opens you to confiscation, the city can raise property taxes a few points to pay for deficits. In the recession many counties across the country raised rates to offset declining values.
    We already heading towards a Cyprus with Social Security, as 12.4% of my income (6.2 employee and 6.2 company) as the liberals want to introduce “means” testing. Since the average American hasn’t saved enough there will be enough wanting to confiscate from the above average saver. Even if I receive only half of what I put into Social Security, that’s equal to a 6.2% tax.
    “Financial Transaction tax, means testing, and savings tax are nice words for government theft.

    • Investor Junkie says

      Not saying it would happen here, but in Venezuela Hugo Chavez would have a weekly TV show just taking over businesses and property. Watch the BBC documentary.

      http://www.youtube.com/watch?v=_DxwzMmcYa4

      So if governments steal bank deposits, they certainly will try property as well. Nothing would be safe at that point.

  20. PK says

    “The great thing about bad policy is that if it negatively affects enough people, bad policy will not go through” – So, that quote which is often misattributed to Thomas Jefferson (and is likely John Philpot Curran is correct? “The price of freedom is eternal vigilance”.

    The issue is once you push back on a law, you recognize it’s only a matter of time before it’s introduced in a new form. SOPA/PIPA – I’m watching for those.

  21. tara says

    curious why you say it’s not smart to fund a ROTH IRA since it’s post tax.

    the one thing that we can pretty much guarantee is that taxes certainly aren’t going to go down. only up. and most likely WAY up if our private retirement accounts can even escape the gov’t hands unscathed, which i highly doubt.

    but regardless, you have no idea what tax rate you will paying on the withdrawn 401k, but you know it will be higher than today.

    with a roth, you know exactly what you paid.

    there are pro’s and cons to both, but i think the knowingly paying tax argument is moot. it will all be taxed. and continually higher. not to mention a ROTH is much more liquid money for people who may find themselves in a financial conundrum and need it. medical or first time home purchase.

  22. Brent says

    This is how the “Cyprus Scenario” will come to the USA. First, it will be a tax on the bank accounts of “millionaires and billionaires.” It will get support from all sides since the lower and middle class will want the upper class to “pay their fair share” and the politically connected upper class will figure out exemptions.

    Phase #2 will be reclassifying “millionaires” to mean anyone who has more than $250k in their accounts. Since a majority of the voting base will be on some sort of government assistance and be under that amount, this will make it through.

    Many years down the line, all bank accounts will just be taxed, but it will be advertised as a “cash holding fee” or something. Everyone will just accept this as “just how the system works.”

    The political class will revise history and never mention that there was a time when there was no tax on bank accounts. Any group that does mention it will be labelled as being on the fringe.

    • Financial Samurai says

      It is interesting how millionaires are classified as those who make $250,000 or who have not a million in their savings.

      It amazes me we are allowed to vote to raise other people’s taxes but aren’t willing to pay more ourselves. See Proposition 38 in California where all would pay more taxes to raise $10 billion for our State’s education that was shot down, but Prop 30 was overwhelmingly passed where only those who make over $250,000 have to pay a 13.3% State income tax that raises $6 billion.

      The government will come for us all. We must figure out ways to escape.

  23. Jason says

    Great article and comments Sam. I think you’re becoming less of a bleeding heart liberal as you go along in “retirement”. I like it.

  24. Branscum says

    This is almost exactly what President Obama’s Auto Task force did to Delphi employees. They decided to take 25 to 75% of employee’s pensions to save the UAW in the GM bankrupcie.

  25. mysticaltyger says

    Sam,

    I think you said a lot of smart things here. Unfortunately, the reality is that safety is an illusion…especially in the way the current money system ponzi scheme is set up. I think the best thing we can all do is to minimize our dependence on money as much as possible. That means helping each other more instead of relying on paying for services. It means growing our own food, having our own local energy supply, etc. Tough to do, but I think that’s the direction we need to go….anything we can do to move away from centralized systems is a move in the right direction.

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