The latest financial progression of currency devaluation, asset confiscation, capital controls and ultimately political upheaval seems to have become a slippery slope that could easily decimate whatever investment funds you may currently have placed in paper assets.
Furthermore, the recent threat to levy bank deposits as an alternative to providing bailout money that was proposed as a solution to the Cyprus banking crisis has left many depositors increasingly wary of placing the bulk of their wealth on deposit with increasingly shaky financial institutions.
Another notable risk to depositors is the possibility of the monetary authorities reneging on their support for deposit insurance corporations, such as the insurance currently provided on bank account balances up to a certain limit by the privately-owned Federal Deposit Insurance Corporation or FDIC in the United States.
Pushing Back the Risks
Based on an on-the-record statement by Euro group head JeroenDijsselbloem, that he admittedly later backed down from somewhat, the highly controversial Cyprus banking crisis proposal to levy depositors with troubled banks and effectively wipe out bank bondholders is part of the Eurogroup’s strategy of “pushing back the risks” onto those who have invested in, deposited with or operated such banks.
Such proposals offer a relatively convenient way for authorities to get around challenging parliamentary votes and allow them to impose more bail-ins, in this case at the expense of wealthier depositors holding over 100,000 euros.
Although Dijsselbloemlater backtracked on the idea that this bank levy strategy might be a template applied to other troubled European Union banks by subsequently claiming that the especially worrisome strategy was instead “tailor made” for Cyprus, the financial markets were understandably concerned about the Eurogroup’s proposal.
Despite the reportedly large Russian deposits currently being held in Cypriot banks, Cyprus and Russia have been old enemies.
Furthermore, most of the European Union’s member nations have historically had a tumultuous co-existence, and intra-European relations have been repeatedly strained by war and other traumatic geopolitical issues. Attempting to unitethese culturally diverse nations against a common or new enemy is an old tactic.
Nevertheless, this reckless attempt to implement aCyprus banking rescue reveals not only the political nature of the crisis, but also the apparent depth of ignorance that monetary leaders like Dijsselbloem often demonstrate.
To an outside observer, this seems almost as absurd as Japandrawing a line in the sand with China in what could only be a form of geopolitical posturing.
Most of the major economies are presently engaged in a policy driven race to debase their national currencies in the name of boosting exports, but which is unofficially being performed to reduce the value of their increasingly overwhelming sovereign debt.
Devaluing a national currency for these reasons tends to be a defensive posture. It also typically has the effect of putting everyone concerned on edge, as differences become inflamed and old stories about what could happen become exaggerated.
Currency debasement is something like a trade tariff, but worse, because it is all inclusive and affects just about everyone who has dealings in that currency, not just a specific industry or those involved in an import/export business.
Capital Controls, Earthquakes and Financial Meltdowns
The effect on the foreign exchange market of the imposition of capital controls is that it tends to magnify the importance of the declared legal tender. Furthermore, citizens of the affected country become financial captives of their state, as capital controls tend to result in monetary policies that lack wisdom, common sense and humanity.
At the base of the problem is typically a paper currency that also happens to be a commodity with little to no intrinsic worth, that produces virtually no interest or dividend and which is only backed by the promises of a sovereign nation whose monetary policies seem inhumane to the middle class, the poor and the elderly.
Overall, storing precious metals like silver to use as hard currency during surprise ‘banking holidays’ and other financial meltdowns — as well as in the aftermath of severe earthquakes or other natural disasters — seems a prudent course of action in today’s uncertain world.
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