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Justice Litle
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Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter and editor of trading research advisory service, Macro Trader. If his name sounds familiar, it's because Justice is regarded as one of the top... More
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  • The Next Stage In The Financial Crisis Starts Here 0 comments
    Mar 20, 2013 10:10 AM

    As part of a €10 million rescue deal, the European Union, the European Central Bank and the International Monetary Fund have decided to burn depositors in Cypriot banks.

    Depositors with less than €100,000 face a 6.75% levy on their accounts. Depositors with accounts over that threshold face a 9.9% loss.

    These institutions are run by clowns with matches. And their antics are taking place near tankers filled with kerosene.

    The authorities argue that Cyprus is a "special case." That's because, in addition to being home to a spectacularly risky banking system, Cyprus is a quasi-legal tax haven and black-money stash for Russian oligarchs.

    So the authorities wanted to send a message to foreigners using Cyprus as an offshore haven for their hot cash.

    And because someone had to pay for the Cypriot bailout (a demand of Germany, Finland and others)... and because the Cypriot government didn't want to anger the big-money tax dodgers using it as an offshore bolt-hole... the powers that be decided to make small depositors take the hit instead of large ones.

    The decision to confiscate funds from small Cypriot depositors... if it goes through... will have disastrous long-term effects for the following reasons:

    1. Despite the draconian measures, the Cypriot economy is still a strong candidate for collapse.

    2. The bailout shatters the unspoken rule protecting small bank depositors.

    3. It strips the EU, the ECB and the IMF leaders of any remaining credibility in the eyes of small savers throughout Europe.

    Details are hazy as to who green-lit the decision to punish small depositors. But it's clear that Europe's austerity enforcers demanded some kind of financial reckoning. And so they agreed to the Cypriot government's panic proposal to protect the big fish by going after the little fish instead.

    This is a colossal failure of common sense... and a truly dangerous precedent for other bank depositors in the euro system.

    The Cypriot government's last-ditch effort to save itself as a financial haven (somewhere between legal and illegal) was a waste of effort. The big money oligarchs who have been using Cypriot banks to stash their cash will now yank out remaining funds in fear of further confiscations.

    This means that the Cyprus economy -- basically a financial pyramid scheme -- still faces collapse.

    Meanwhile, small depositors in Europe's other troubled periphery nations will wonder whether they will face the next "special case" confiscation next.

    Put simply, millions of eurozone depositors could start pulling their cash out of the banks and stashing it under the mattress.

    Here's how the system is SUPPOSED to work...

    Big fish investors have potential to see huge returns from their bond holdings. But they can also lose money if things go wrong.

    Little fish depositors don't have a shot at big returns. They earn their fixed rate of return (usually almost nothing) on their deposits. But in exchange for loaning money to the banks by way of their deposits, they are assured their deposits will not be put at risk.

    Except now the technocrats in Europe and the IMF have decided to break the unspoken rules and violate the sanctity of small depositor protection.

    This is bad news for bank depositors. But it's good news for gold. The yellow metal has been trading poorly of late. Since the start of the year, the gold price has fallen about 6% on a growing consensus the financial crisis was under control.

    This is now being revealed as pure illusion... and an only temporary pause in the global financial crisis that began in 2008. The next stage of that crisis starts here. Now is a great time to buy gold, before this reality sinks home.

    Carpe Divitiae,

    Justice

    Themes: Cyprus, gold, eurozone
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