Cypriot Possibilities

Includes: FXE, UDN, UUP
by: Roger Nusbaum

By now you've heard the news about the plan in Cyprus to confiscate or tax deposits; 10% for balances greater than €100,000 and 6% on balances less than €100,000. A client emailed asking if such a plan could be implemented here; we clearly have financial problems, regardless of what you think the outcome will be there is clearly a debate about whether social security and medicare can survive.

The threat of confiscation is not new. The big difference between the U.S. and the countries in the euro zone is the currency union versus the U.S.' control over its own currency. For the same reasons we are not Greece we are also not Cyprus. The U.S. can simply print more money as it has been doing. This of course leads to a different bad outcome. The threat of inflation down the road is an easier sell than confiscating some percentage of our savings.

A couple of other more fundamental differences between Cyprus and the U.S. is that the Cypriot banking system, like Iceland used to be, is around 600% of the GDP and part of the equation here could be the extent to which Russians hide money there.

Cullen Roche has talked a lot about his belief that the Fed is not printing money but is swapping assets, but I don't know if he still writes about this. The part of that argument that I don't understand is if it's not money printing, where does the Fed gets its assets to swap from if not printing (I realize we are not talking about literally printing bills in the basement). The Fed's balance sheet has gone from $800 billion to around $3 trillion. To the extent this is printing more money, the Fed can and has said it will keep going. Again, a potentially different bad outcome.

(Click to enlarge)

Confiscation then would seem to be unnecessary but it is not impossible. In thinking about possible, probable and reasonably probable, I do not think it is reasonably probable or probable at all that this will happen here but nothing is impossible. Anyone really worried about this happening to cash in U.S. brokerage accounts could buy several different of the shortest bond funds they can find; the kind whose price hardly ever moves and that pay little or no dividend ... or you can bury it in the backyard.

UPDATE UPDATE Now it looks like balances below €20,000 will be exempt.