Gold, Euro Problems And Currency Politics

March 25, 2013

The Cyprus bank crisis exposes the risks of highly leveraged and inflated currencies. The ECB and Cyprus will digitally cover this problem lest the island become a Russian colony which would tilt all issues in the Levant and Middle East. It would greatly impact all commerce. Solvency problems, shrinking growth and demographic crises in Europe will roil markets and speed transition to a new monetary order. The crisis boosts the $ and Yuan (RMB) which like precious metals are set to rise with the new reserve basket of currencies.

The Savings & Loan crisis of the 1980s and the collapse of Lehman Brothers are not ancient history. The latter led to the unprecedented expansion of US monetary base. JP Morgan’s derivative exposure is about $450 T and impossible to cover. The Attorney General has stated on the record such Banks cannot be prosecuted. So issues in Cyprus are a valuable window on structural problems in fiat currency economies.

Taxing bank depositors to pay for bad loans “proved enormously controversial across Europe” since people in Italy, Spain, Greece and Portugal fear they will be the next to pay as the Irish did, taking on the debt of their banks per the ECB. Iceland’s option, punishing some banks and letting foreigners take a loss seems like a one-and-done event. The era of resentment is here: some say Cypriots deserve to be punished because their banks pay higher interest, and they pay lower taxes than others. Such comparisons mark an invidious trend. They also distract from an important debate. Cyprus does not tax dividends or capital gains on foreign investment. If DC wanted to grow America’s economy, a 5-10% graduated rate on such income would spur investment, hiring and help seniors on fixed income as would capping corporate taxes at 12%.


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