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Lessons from Cyprus

Most people probably never heard of Cyprus until the morning of March 18, 2013. It is a small country with a population of 800,000 and a GDP of less than $18 billion. It dropped a bombshell over the weekend when it announced that the government will take a bite out of depositors’ accounts in Cyprus Banks to help pay for its bailout of the financial system. It is called a tax on depositors – 6.75 percent on deposits up to 100,000 Euros and 9.9 percent on deposits over 100,000 Euros. To prevent a bank run, the government froze all electronic money transfers over the weekend.

This announcement has serious implications. It erodes people’s confidence in their banking system and their governments. People’s confidence has already been at a historical low point since the economic crisis in 2008. The investment vehicles we used to believe were “safe” investments such as money market funds turned out not so. Now banks and government decided to openly take money out of people’s checking and saving accounts? It sent chilling messages to the rest of European continents and beyond that there is no way to keep our money safe.

I never thought the ethics of politicians could go any lower until I heard this. If that is the best idea they have, then it means they are running out of good options. And if that is true, then it may signal bigger problems on the way. What the Cypriot government decided to do is not taxation; it is a form of shameless robbery from private citizens in the broad daylight.

It also further complicates the EU’s austerity medicine towards economically troubled countries. The outcry against the austerity in Greece and Italy was a magnification of ordinary people’s hopeless cry towards their financial systems and governments.  Now even small depositors cannot feel safe. This will open doors for radical political movements and make the EU’s road to recovery even more treacherous.

Furthermore, what the EU and Cypriot government are trying to do is an intrusion on property rights, one of the fundamental natural rights. People who own property feel a sense of ownership in their future and their society, while people trapped in a legalized state of robbery feel hopeless. A market-based economy cannot function if participants’ property rights are not protected.

Let’s not forget how the Arab Spring was started. Mohamed Bouazizi, a Tunisian fruit vendor, set himself on fire when the local police confiscated his fruit stand. When legal property rights are not protected by law, the damage goes far beyond money. James Madison said, “Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions.

The Cyprus announcement also set a dangerous precedent. Next time when a nation’s economy experiences even a mild shock, people will tend to make a run on the banks because they learned from precedent like this that they cannot trust the government to protect them. The run on the banks could turn a mild recession into a  severe one.

So what lessons can we Americans learn from this Cyprus ordeal?

We need to put pressure on our politicians now to come up with a deficit reduction plan this year. Our deficit level is unsustainable. If we keep spending the money we don’t have and kicking the can down the road, what happened in Cyprus today could happen to us tomorrow. When that calamity happens, nobody will be spared.

We also need to fiercely protect not only our own property rights, but also others’ property rights. When one enjoys a “free” service from the government, it is only because government takes a portion of someone else’s property in the form of taxation to pay for it. This model can only last as long as there are more people paying tax than people receiving “free” stuff. When the day comes that there are more people receiving “free” stuff than people paying taxes, nobody’s property rights are safe, and everybody suffers.

Remember, nobody cares about your money more than you do, not your family, not your friends, certainly not your “benevolent” government. Don’t put all your eggs in one basket. Spread your savings and investing among stocks, bonds, annuities, CDs, money markets, savings and gold. Diversification is the key here to preserve and grow your wealth.

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Helen Raleigh

Helen Raleigh, CFA is the owner and Chief Investment Officer for Red Meadow Capital, LLC, a Colorado Registered fee-only Investment Advisory Firm, which focusing on providing clients with honest and sound financial advice. She has more than 10 years experience in the financial services industry ranging from pension funds to risk management. Helen is the author of an autobiography, "Confucius Never Said."  She writes insightful columns and blogs for a variety of media outlets and her writings can be found at the Wall Street Journal, the CFA Magazine, the Denver Post and her blog postings. She can be reached at: helen.raleigh@redmeadowadvisors.com

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