Lessons from a Small Island

Cyprus provides the latest in a series of grim reminders that the banking system in the developed Western countries is infected by a self-inflicted, incurable disease called mismanagement, and evidence that savers and depositors – not bankers – will be the victims. The following is a summary of penalties, euphemistically known as “capital controls,” imposed thus far (March 30, 2013) on depositors in the two largest banks in Cyprus:

  • Those with deposits exceeding €100,000 will receive shares of stock in a new, surviving  bank with a face value equal to 37.5% of their deposit amounts. They will never receive  another dime “unless the bank does well,” 
  • Those with deposits up to €100,000 can withdraw only €300 per day from their accounts,
  • No one can pay bills by check without prior approval of the Central Bank, and debit and  credit cards cannot be used,
  • No one can leave Cyprus with more than €1,000.

As we all know, Cyprus is an island. It is forty-seven miles from Cyprus to the nearest land in Turkey, which, unfortunately, is too far to swim. Leaving the island requires either airplane or boat, and since they can take only €1,000 with them and cannot use checks or cards, Cypriots are prisoners imprisoned in their own homes, simply because they made the mistake of trusting a bank to safeguard their money.

“National Emergencies”

Entirely at their own discretion and without any advance warning governments can declare “national emergencies,” and use the declarations as a license to steal. In April, 1933 President Franklin Roosevelt issued executive order 6102 confiscating all private gold in the United States, and history is replete with countless other examples of capital controls. The cold reality is that the biggest risk to financial portfolios is not investment risk; it is political risk. Ways to minimize political risk are moving money into non-bank asset classes that are difficult or impossible to confiscate, and/or moving or acquiring assets offshore in countries with lower political risk. If you live in the United States, it is imperative you understand the concept of “reportable assets,” as defined by Income Tax Law, before you begin diversifying or offshoring. As this article is written there remain viable options for U.S. citizens to own assets offshore without having to “report” them to the government. If you own real estate in a foreign country that real estate is not currently reportable. Perhaps surprisingly, gold and silver bullion held abroad need not now be reported, and U.S. citizens can also open and maintain bank accounts in foreign countries up to a maximum of $9,999.99 per person without reporting.

The Clear Message

If the current financial crisis deepens as it almost certainly will, the available investment options will begin to disappear, and your window of opportunity will close. The message from Cyprus is clear. Rebalancing your portfolio and moving some assets outside your country…

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