What in the Heck Is Going on in Cyprus?
Over the past couple weeks I’m sure most of you have at the very least heard snippets of the banking crisis in Cyprus. When I first heard of the crisis I asked myself, “where is Cyprus.” Turns out it’s an island south of Turkey and East of Lebanon.
For those of you unaware, the country Cyprus is on the verge of bankruptcy. How did Cyprus get into trouble? Well, the country entered the European Union in 2004 and starting issuing the euro currency in 2008. What followed was Cyprus grew too big too fast without any meaningful regulations. Their lax structure made it a haven for some of Russia’s wealthiest citizens (some deemed criminals) resulting in them accruing a lot of assets (bank deposits). Cyprus in turn decided to put that money to work by heavily investing in Greek bonds. As I’m sure you all know, Greece is in dire straits and bankrupt therefore defaulting on their bonds which in turn results in major investment losses for Cyprus.
So what now? Cyprus is in the process of fishing for bailouts from the European Union. In the meantime Cyprus plans to sell off their entire gold reserves and seize a significant portion of bank deposits in excess of 100,000 euros. Yes, you read that correctly! Last I read Cyprus proposed to levy a one-time tax of 20% on all uninsured accounts in excess of 100,000 euros. That is absolutely insane, don’t call it a tax call it what it really is, robbery! Obviously sound rational thinking Cyprus citizens called it robbery as well and attempted to withdraw their money. This led to Cyprus closing all banks for 12 days, when banks reopened they only allowed individuals to withdraw 300 euros a day (approximately 9,000 euros/month).
Talk about a dangerous precedent. A country is on the verge of bankruptcy and one of their top plays is to raid sizable savings accounts? Can anyone say socialism? In all seriousness we need to ask ourselves is our world becoming socialized. A government sanctioning the seizure of citizen’s private assets is a very slippery slope. Heck, the Dutch Finance Minister flat out said this model of confiscation may become the template for Europe. How scary is that?
Ways to Protect Yourself
I know Americans are sitting back thinking, “something like this could never happen here” while other Americans are frantically pulling their money out of banks. I don’t have a crystal ball but I’m somewhere in the middle. While very disturbing and frightening there are some things you can do to limit the effects of socialist government decisions like the ones currently being displayed in Cyprus.
Dividend Growth Portfolio – Build a dividend reinvestment portfolio that will provide you ample passive income. We can’t all create a business, therefore the next best thing is investing in the largest and best businesses that have pricing power to keep up with economic downturns and inflation. Think about a company like McDonald’s, do you think people will ever stop eating Big Macs and Happy Meals? I sure don’t, although I hope they decide to do it sparingly, I expect my children and their children to eat McDonalds. McDonald’s can increase prices, shrink portion sizes, and people would still eat their food, they’re brand is absolutely iconic.
Real Estate – If you have the time, discipline, and capital look into purchasing an investment property. Real estate is one of the quickest ways to wealth due to leveraging “other people’s money” in order to acquire passive income.
Additionally, if you don’t feel comfortable investing in real estate, simply pay your mortgage off. There has been a lot of debate in the financial blogging community about this topic but I’m going to throw you a curve ball that you likely have not considered. Prior to the 2001 Argentina collapse the Peso was pegged to the U.S. dollar. Therefore when individuals obtained mortgages they were in U.S. dollars. As the collapse unfolded the Peso became unpegged and fell significantly, but the actual debt homeowners held were in dollars and they were not granted amnesty. They now earned less money in terms of dollars yet held the same debt. Nobody knows for certain what the government will do if we were to enter into a crisis but I’d be willing to bet my blog that whatever they decide to do will not be towards your benefit.
Precious Metals – There is a lot of negative sentiment towards precious metals. Even the legendary investor himself Warren Buffet claims “gold is stupid.” In an interview back in 2009 when asked his thoughts on gold he had this to say…
“I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.”
I think Buffett is absolutely correct, gold is an awful investment, but in terms of wealth preservation I believe gold and silver is paramount given today’s economic climate. Purchasing gold or silver should not be looked at as an investment but rather a preservation of wealth from socialist governments around the world. Paper currencies come and go but precious metals have been around since Ancient Rome.
Ladies and gentlemen it should be no surprise that the world and our country is headed towards an economic storm. We simply cannot stick our heads in the sand and ignore this fact. I recently stumbled across a great quote from Abraham Lincoln over at Fearless Men, it resonated with me deeply and I hope it does with you as well.
“I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts.”