There has been much chatter over the years on what the government might do to save itself should we here in the United States undergo any type of future financial crisis or repeat of the 2008 financial turmoil we experienced. This topic is especially of interest now with the recent proposal in the country of Cyprus to tax existing bank deposits as part of a rescue package put forth by a German led group of creditor countries. Isn't this a form of confiscation?
From Business Insider;
Meanwhile, reports indicate that plane tickets from Moscow to Cyprus are sold out. This could indicate that Russians using the Cypriot banking system as an offshore tax haven are scrambling to get their cash. We have already seen lines at ATMs this week in Cyprus as local depositors try to pull whatever they can out of their accounts.
Cyprus has a rising Debt to GDP issue they are dealing with, which is the focus of those who are looking for solutions for the tiny island off Greece, which has been affected by the Greek crisis. We have seen the Debt to GDP ratio rise in many countries over the last decade. Japan, for example, leads the world in Debt to GDP ratio at over 200%.This is why you have seen the price of gold rise 10.5% the last 6 months priced in Yen.
While the U.S. has about half the Debt to GDP ratio Japan does, it is still a concern for many when you have a U.S. Congress that does nothing to curtail it, but alternatively add more debt to the problem.
Bernanke and his economists from Harvard, Yale and the Wharton School of Business think that spending is the solution to get the economy on track and approve of the Quantitative Easing that Bernanke and the Federal Reserve have been implementing as a way to get the economy going. But the result so far is not a strengthening economy, but only a propped up stock market that doesn't have the same valuation as the last time it reached its all-time high in 2007, and a slight rebound in real estate in some areas as banks hold onto their marked to 2007 real estate assets, thus decreasing the supply available, making what little supply there is move higher in price because of the demand for it.
But did these economists or Bernanke see the 2008 crisis coming? What happens if or when the current spending plans of Congress and the Fed, while well intended, backfire? Will they turn to the taxpayers again as they did under President George W. Bush with the passing of another TARP type program? Or will Obama simply implement Executive Orders and go after your gold and bank deposits? This article will help explain what is possible and what is not possible this day and age should our economy turn south again, resulting in a crisis that might dwarf that of 2008, causing our government to possibly take drastic measures again.
Will There Be Confiscation of Gold?
There are many in the camp that gold could be confiscated again. I am not in that camp. There was in fact a time when gold was confiscated in the U.S., during the Roosevelt administration in 1933. Executive Order 6102 was signed by President Roosevelt on April 5, 1933, "forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates." Executive Order 6260, August 28, 1933 amended 6102 by saying: " ... no returns (of gold to the government) are required to be filed with respect to Gold coin having a recognized special value to collectors of rare and unusual coin."
Many gold dealers will try and use the above confiscation orders to sway people to buy coins with a collector's value and high commission. Their entire sales pitch was centered on the fear of confiscation as they pushed investors into pre-1933 coins or European coins with high mark-ups.
The reality is Executive Order No. 11825, written December 31st, 1974, revoked Executive Orders 6102 and 6260. There are no laws on the books that say the government can or will confiscate gold.
In fact, a recent lawsuit against one of the largest gold dealers, Goldline International, was settled out of court and Goldline was ordered to change its sales tactics and agreed to pay $4.5 million into a restitution fund.
According to the Santa Monica city attorney's findings, "Consumers were falsely told that the government could confiscate and seize gold bullion, but that this could not happen to the overpriced coins," and Goldline was ordered to "not tell consumers that the government can confiscate gold bullion."
For the government to attempt to confiscate gold today, they would have to hire thousands of people to knock on everyone's doors like census takers and expect those who own gold to answer in the affirmative. This is not 1933 and from my talking to clients on the phone, many who own gold, also own firearms. With the internet in full swing, and social media so effective, any attempt to confiscate gold would be met full force.
It's nonsensical to think the government could do such a thing today, as they could simply raise the tax you pay on any capital gains from gold. This, however, I believe have serious dollar value ramifications as the government already taxes gold at a higher rate than stocks. If a higher tax on gains of precious metals was implemented, the dollar could become perceived as having weakness. Remember, the dollar only has 43 years of existence without a relationship to gold, and it hasn't done that well over those 43 years as it buys you less and less. Taxing gold even further would show how much they actually value gold as competition to the dollar.
Some may think that the government could just come in and get gold by taking over the various ETFs like GLD or SGOL. I don't think this is possible and will address potential confiscation of IRA's, 401k's and such in another article.
Lastly, if you are worried about gold confiscation, buy silver. Silver was never confiscated. A 1964 Roosevelt dime could buy you a loaf of bread for 10 cents then. Today, the silver content value of that same dime, at just over $2 can still buy you a loaf of bread. So if we forget the discussion about what the real inflation rate is, my purchasing power holding metals hasn't hurt me. But those that held onto their 1965 Kennedy dimes can't do much with that dime today. Funny how a $1,000 face amount of silver quarters and dimes from 1964 has a value of over $22,000 today at a spot price of around $29. But supplies are hard to come by right now, even with the recent fall in silver prices.
Will There Be Confiscation of Bank Deposits?
When you signed on the dotted line for opening a savings account at a bank, do you remember any language in the contract stating the bank could outright tax your bank deposit? I thought banks just paid you interest on your savings. Now there is talk of intervention in some banks where they have the nerve to go after your money and take from you your hard earned money by taxing it? Could it happen someday in the U.S. "if necessary" should our government run into problems with the economy? Don't we already pay taxes on the income from those bank accounts? And what return are they even paying today on your savings? Not much at all.
Or will the Federal Reserve just simply print more money?
The following is a quote from the article referenced in the first paragraph above;
Cyprus is trying to get a €10 billion eurozone bailout. Under the original Euro group proposal on March 16, all holders of bank accounts in Cyprus -- both residents and non-residents -- would have been required to pay a one-off tax on their existing deposits. Account holders with more than €100,000 ($130,000) would have paid a 9.9% levy and those with smaller deposits 6.75%. However, discussions around the specifics of the deal appear to be ongoing.
The money would be used to prop up Cypriot banks that were badly exposed to the financial crisis in Greece. The Financial Times reported that the depositor levy was demanded by a German-led group of creditor countries to bring down the bailout's price tag from €17 billion ($22B).
Cypress and Greece can't print their own money like we can here in the U.S. Neither can Spain, Italy and Portugal. These countries Debt to GDP ratios are going the way of Japan which should give you a hint on how. This also explains why one of the few successful countries that exists in the eurozone, Germany, is trying to dictate to everyone else what needs to be done, not at the expense of the banks who made the decisions that led to the crisis they are presently experiencing, but form the savers who trust the banks to live up to their contracts.
The problems with Europe I have been pointing out since the first European bank stress tests of 2010 when I wrote the following in an article in July of that year;
The July 23rd European Bank Stress Test Results Will Be One Big Con
I don't expect any real bad news to come from the July 23 Bank Stress-Results. They'll just reveal how the capitalization ratios have been increased to where banks can sustain any further sovereign debt crisis should it come.
But the data tells me things are much worse than anything they may say.
The system can't afford any panic. Panic results in runs on banks. The bankers meeting today don't want any panic to occur when they announce the results. "All is well with the banks!" will be their mantra.
If the banking crisis of 2008 resulted in the too big to fail banks actually failing rather than being bailed out, where would we be today? If you weed out the bad in society, then good is in theory what is left. Who has it good today? Who is benefiting from TARP and other Fed related maneuvers 5 years later? The answer is the banks. Bank profit hit 141.3 billion for 2012, the second highest total since 2006, and the last time we had a bubble begin to burst.
The Federal Deposit Insurance Corporation reported in late February;
Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $34.7 billion in the fourth quarter of 2012, a $9.3 billion (36.9 percent) improvement from the $25.3 billion in profits the industry reported in the fourth quarter of 2011.For the full year, industry earnings totaled $141.3 billion - a 19.3 percent improvement over 2011 and the second-highest ever reported by the industry after the $145.2 billion earned in 2006.
Things may look good on paper today, but the nation's largest banks have more sub-investment grade derivatives on the books today than they did at the height of the 2008 financial crisis. Below you will see the most recent OCC's Quarterly Report on Bank Trading and Derivatives Activities showing how the total sub-investment grade derivatives have grown from 2009 figure of $4,651,146,000,000 when the Dodd-Frank bill was passed to $5,274,992,000 today. How is this reform? The bad news is the maturity dates of this class of derivatives are moving closer and closer to coming due. Who will be the counterparty to these sub-investment grade derivatives? (See table below)
Who is to say that if we let the big banks fail, we wouldn't have had twice that profit? In a good economy, profit is the goal. But if that profit stems from government handouts, and the underlying problems aren't addressed, then how long will it be before these too big to fail banks stick their hands out again, asking for more help?
Action Plan to Protect and Grow Your Wealth
While thinking about what the government may or may not do when it comes to confiscation of Gold or Bank Deposits, proper asset allocation will help prepare you for the future. Asset allocation simply means that you are well diversified among many sectors. When one sector does well, profits are taken and spread across the other sectors to balance your overall portfolio.
A good performing Asset Allocation fun is Value Line Asset Allocation Fund VLAAX which has returned on average 9.62% since inception.
But many portfolios do not own the one asset that any type of crisis will deem important to own. That asset is gold. During the 2008 financial crisis, gold ended the year positive. Not too many assets can claim that performance.
The Dodd-Frank Wall Street Reform and Consumer Protection Act put the Fed in charge of oversight of the markets today. The fox is indeed in charge of the hen house. That's what we're seeing unravel in Greece and Cyprus whose banking situation is a mess as the German-led group of creditor countries tries to force their hand.
Over the last few years we have seen more and more how fragile the banking system is. With 2008 as our backdrop, which no one in Congress or the Fed saw coming, and despite the recent bounce in the stock market and real estate, things can change on a dime should one of these sub-investment grade derivative bets backfire or some European crisis further unfold. The proposals for Cyprus shed some light on these issues.
We already saw a hint of potential problems in 2012 with J.P. Morgan's London Whale episode. The trade started out at $1 billion, then went to $2, then $5 and ended up at $6.2 billion. J.P. Morgan (JPM) has $2.1 trillion worth of these stories to tell the next 5 years, more than the entire net worth of their company. The U.S. Senate has said that J.P. Morgan is still ignoring the risks today.
The reforms that the Dodd/Frank bill was created to improve the health of our economy and prevent future problems never did anything to curtail the banks appetite to take risk. What does a bank have to lose if they know they are untouchable? Is it 2008 all over again? Will it really be different this time?
One can protect themselves by buying physical gold as I mentioned, or hedge their portfolio with an allocation into TBT, GLD, SLV, and SGOL as a start, dollar cost averaging into a position, which I have been recommending since June of 2011. Many Asset Allocation models don't include precious metals, so you might have to add this allocation separately to your portfolio.
Of note, I don't recommend most investors go on leverage to trade metals or play the double or triple ETFs like UGL or USLV as the risk can be greater than many expect, especially as investors have learned the past year or so with the decline in gold and silver prices.
While the timing may look good to buy physical gold and silver, precious metal ETFs or an inverse Treasury ETF like TBT now, the prices could still fall lower. I have been waiting for the market makers to take us down and squeeze out the late buyers of metals, especially those on leverage. Will that occur? I don't know. While I am dollar bullish and have been over the short term, it's simply because of all the problems going on in Japan, the UK and Europe. By default the dollar has benefited and gold has taken a bit of a breather. But any sort of a banking mishap here in the U.S. by one of the too big to fail banks, can bring about my article calling a bottom. I'm just not ready to write that article yet, but a little insurance in gold can give you some peace of mind.