Browsing the blog archives for March, 2013.

The Cyprus Deal & Lessons Learned

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Negotiators reached a last-minute deal earlier today to stave off the Eurozone’s first eviction. While the arrangement does not include the direct confiscation of deposits, it is not without its flaws. Complete details are not yet available, but the agreement includes the closure of the country’s second largest bank, resulting in substantial losses for those with (uninsured) deposits over 100,000 Euros (~128,000 USD).

This story isn’t over yet, but there are some obvious lessons that can already be identified:

  1. Uncontrolled debt will take it’s toll, sooner or later. The later it comes, the fewer and more severe the options. Cyprus probably got a better deal that was originally proposed, but the pain is real and will be felt for years to come.
  2. When resolving a financial crisis, the government will always attempt to transfer as much of the pain to the more productive as possible because lower income earners are higher in number and more willing to protest/riot. However, the wealthiest often survive because they are well represented in the governing class. Notice that the original bank levy proposal only addressed bank deposits, not stocks, bonds and property more likely to be held by the wealthiest Cypriots. The demonized “top 1%” in Cyprus do not have most of their assets in banks anyway. In the end, the biggest hit is always felt by the middle class.
  3. Government access to private information should be limited, whether we’re talking about bank accounts, medical records, or gun registrations. The government can attempt to do just about anything in a “national emergency.”
  4. As George Washington advised, nations should avoid as many foreign entanglements as possible. Countries like Germany and France are learning this lesson in the economic realm. Financial collectivism among nations always transfers wealth to the weaker countries and risk to the stronger ones.
  5. Individuals should consider holding as much wealth as possible in assets less susceptible to easy government confiscation, such as precious metals or property. Bank and retirement accounts are easy prey.
  6. If you live in a troubled EU nation (particularly Cyprus, Portugal, Spain, Greece, or Ireland), limit the amount of money you keep in local banks. “Government insurance” is only as strong as the integrity of government officials. The next attempt at bank deposit confiscation might be successful.
  7. If something happens in the EU, it’s not far-fetched to think it can happen in the US. At the end of the day, the Constitution won’t protect us without a cadre of elected officials willing to defend it.
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Draining Bank Accounts in Cyprus

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The EU’s bailout of Cyprus took a chilling turn over the weekend when it required (more or less) the Cyprian government to confiscate a minimum of 6.75% of deposits in Cyprian banks as part of the deal. The confiscation rate is 9.9% of balances above 100,000 Euros, resulting in a total seizure of $5.8 billion Euros (7.6 billion US dollars). Put another way, the government is taxing wealth to pay its debts. Considering that Cyprus is an EU nation and not a despot-run third world country, this move should send chills down the spine of every American that doesn’t believe a similar measure could actually happen here at some point.

To be fair, there is some context worth noting. In short, several EU countries like Germany are tired to footing the bailout bill for less responsible countries. They are pressuring countries receiving the aid to experience more of the immediate pain. This is understandable–to a point.

But the larger lesson here is simple. Sooner or later, a nation that cannot pay its debt must seize the wealth of its citizens directly through taxes or indirectly through currency devaluation, or go bankrupt. What makes the Cyprian wealth tax so scary is that the government is simply taking the money. At least tax increases and government budgets can be widely debated before being passed into law. What’s happening in Cyprus is a confiscation of wealth in the dark of night. They’re calling it a “one time” tax, but only fools believe it can’t happen again, or in other nations.

Could a similar move occur in the U.S.? Consider the fact that individual 401(k) plans contain about $4 trillion in balances. A “one time” 9.9% tax could generate about $400 billion in revenues right away. The left might see this as “fair” because it steals only from the “rich” who could “afford” to put away money for retirement in the first place.

To be clear, the U.S. and Cyprus are not in the same financial situation. But while Cyprus is further down the road, we are traveling along the same highway. Given ongoing $1 trillion deficits and a burgeoning national debt, a spike of inflation would put the U.S. treasury into a serious quandary. The available options will be limited when this happens, including some many Americans never expected to be on the table.

As for Cyprus, stay tuned…Some are proposing alternative bank deposit levies with lower rates for balances under 100,000 Euros and higher rates for balances above 100,000 Euros. In the end, most of the pain will be felt by those who are most productive.

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The Government & CEO Pay

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The Swiss have taken another step to control executive pay. The drumbeat for similar action in the U.S. continues (see http://online.wsj.com/article/SB10001424127887324678604578338171658493636.html). Don’t be surprised if the President follows suit as part of his ongoing anti-corporate agenda.

I don’t expect Obama or the Democrats to propose a strict pay limit, however. Proponents of government pay controls rarely seek to limit compensation directly, lest they appear harsh and unreasonable. They prefer indirect approaches, such as requiring firms to pay an extra tax for salaries above a level deemed “fair” by the government elite, or prohibiting certain types of bonuses or benefits, or allowing shareholders to vote on pay levels set by their elected representatives (the board). Such proposals sound like reasonable compromises to uninformed voters, but they achieve the same ends–government control of free enterprise.

The case for regulating CEO pay is a weak one. Most typical left-leaning voters struggle to move beyond the notion that high pay for executives “just isn’t right.” When pressed for a more substantive response, pundits and academics often couch their arguments in intellectual jargon or vague philosophies, such as a demand for “distributive justice” (i.e., the market isn’t fair in determining who gets what so the government must step in), or the greater need for these extra funds in areas such as poverty alleviation and education, or the notion that an executive should only make X times what the lowest paid worker in the firm makes. Of course, these arguments fall apart under scrutiny. If the government is more effective than the private sector at resource allocation, then why are nations like North Korea, Cuba, and Venezuela failing economically? Posing rational questions like this do little to sway public opinion because the anti-CEO rhetoric is based in the emotion of greed.

All of us might agree that a CEO doesn’t “need” $50 million to live a good life, but that is not the point. Private property should be private. It’s not the government’s business how much a CEO earns, even if it does appear to be too high. If you own shares in a company and don’t like the executive pay levels, then you can elect a new board to represent your interests or sell your shares. If you’re not a shareholder, then you can choose not to buy the company’s products or services. Otherwise, it’s not your business.

Unfortunately, most Americans have accepted the idea that private property is not necessarily private if society (AKA, government) objects. Whether it’s wealth redistribution or the abuse of eminent domain, they seem to willing to negotiate what is really private, especially when the property in question belongs to someone else. Government regulation of individual compensation levels is just another step in that direction.

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The Sequester Hits…

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The sequester has already been analyzed to the hilt but 2 points are worth underscoring.

First, the spending cuts–which are only decreases in increases–amount to only $85 billion compared to a $3.6 trillion budget. If the President is correct and these types of cuts will be devastating to our way of life, then how will it ever be possible to balance the budget? $85 billion is less than 10% of the 2012 deficit. The Democrats tell us that all of this can happen in the future after the economy improves, but not if the first $85 would result in cuts to first responders, the release of prisoners, and fewer teachers. The retort to the President is simple: If there is nowhere to cut even $85 billion from the budget, then how will we ever achieve anything close to a balanced budget short of massive tax increases?

Second, the administration’s top economic advisor is claiming that 750,000 jobs will be lost as a result of the cuts. If $85 billion in government spending equates to 750,000 jobs, then the original stimulus bill currently valued at $831 billion would have added over 7 million jobs, thereby cutting unemployment in half. And this doesn’t include various other stimulus packages. Why isn’t the media questioning the Keynesian logic that underscores this claim? Do we really need to spend money we don’t have just to keep the official unemployment rate at around 9%? Is this the best argument the administration can make?

These mandatory “cuts” are only the beginning of what must happen before we can restore fiscal sanity. Let’s hope the Republicans don’t cave.

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