Capital Controls After All
I don't expect this to be particularly successful, given that Cyprus is a small trade-dependent economy. When Malaysia imposed something similar back in 1997, it had a decent domestic economy with some real natural resources behind it. Cyprus, as far as I can tell, doesn't have anything like that kind of economy.The government was expected to decree that cash withdrawals would be limited to €300 a day and Cypriots would not be allowed to transfer their savings overseas.The measures were designed to prevent a run of the banks, after a tumultuous two weeks in which Cypriots learnt they would lose billions of euros from their accounts in an accord drawn up by the government to secure a €10bn euro bail-out from international lenders.Businesses and individuals with more than 100,000 euros are in for a massive hit and could see at least 40 per cent of their savings forcibly converted into bank shares.The two worst hit lenders are Laiki Bank, which is to be dissolved, and Bank of Cyprus, which will absorb Laiki’s assets.Payroll transactions will be permitted so that businesses can pay their employees.
And hot on the heels of the Cypriot attempt to stem the tide comes speculation about whether governments can, or will, go after your hard assets:
Only the most purblind fool would assume that governments will somehow restrain their power and stop themselves from going after the number one monetary alternative out there today. Gold literally is money- it satisfies every single one of the fundamental requirements of a transaction currency. And, unlike paper money, it is not based on credit (a.k.a. "unfulfilled promises"), but on a real, physical substance with real, tangible value. When- not if, but when- paper currencies finally collapse, the first substitute people will use will be gold. And that, more than anything else, makes it an enormous threat to government power. That is precisely why a repeat of Roosevelt's confiscations of private gold are not likely to be repeated- they are certain to be repeated.Roosevelt's 1933 gold raid is well documented but it's often forgotten that in 1966 Britons were banned from holding more than four gold coins or from buying any new ones, unless they held a licence.It's not just gold that governments can confiscate – pension assets can be in the firing line, although usually only in emerging markets and in extreme circumstances. In recent years, private pension schemes have been nationalised in Argentina and Hungary.Could such a scenario happen today? It seems unlikely. In the Thirties, the dollar was pegged to gold and confiscation was simply quantitative easing by another name, while gold investment today is a global phenomenon, so policing any enforcement could be an onerous task.And if they did confiscate all private holdings of gold, would it be enough? Such holdings are worth 1.5pc of world economic output. As the gold standard has been broken, the value of all the world's money is now far in excess of the value of gold stocks. A major financial crisis usually costs a national government around 5pc to 10pc of economic output. So for most countries, confiscation of private gold holdings wouldn't save the day. In Cyprus, with its bloated financial sector, the bill is more like 30pc. Cyprus showed how much more could be raised by an immediate tax on bank accounts.