Pull Out the Atlas Again

As we all well know, the most recent casualty country involving a seemingly irrelevant economy with highly relevant euro linkages is of course Cyprus. The restructuring of Cypriot banks involves a tax on deposits above a certain threshold and has far reaching consequences, not only for the enraged citizenry, but also for the future of Central Bank strategy. While others in the Euro bloc might find it unfathomable that such an onerous bail out package could ever be imposed on them, the fact is that this weapon has been employed and one wonders whether this tactic was a trial balloon to see how severely markets might react. If this type of tactic seems so far fetched when applied to major economies, we would point out that such a tax is currently imposed on savers in this country given the steep negative real rates of interest that exist at the front end of the curve. Through its ZIRP this  Government is confiscating your money, albeit in a manner that appears slightly less heavy handed. While we do not want to draw spurious analogies with a country whose economy is a paltry $29 Bln in size, it should give investors some pause as they begin to think through the possible resolutions to our own fiscal crisis. We would maintain that system wide taxes such as this are now clearly in the quiver of politicians worldwide, and that proactive investors should begin to position themselves in assets outside the purview of such taxes; namely hard assets.

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