Cyprus & Why Investors Must Be Careful Not To Get Wiped Out

Today one of the wealthiest people in the financial world warned King World News that in the aftermath of what has taken place in Cyprus, investors have to be very careful going forward so they are not wiped out financially. Here is what Rick Rule, who is business partners with billionaire Eric Sprott and the CEO of Sprott USA, had to say about Cyprus and what investors should expect going forward:

“What they are saying now is that the Greek banks are exempt from some part of deposit tax and controls, which means all of the burden will fall on the Cyprus offshore banks.  And some of the depositors are expected to lose some of their deposits.

Of course they have put in exchange controls, which is interesting in a country that is part of a currency union….

“So what they are basically saying is it’s OK if you can  smuggle, but you are really in trouble if you obey the law.

There is a bigger issue here, Eric, and that is the deposit insurance is an implicit promise from a government to protect yourself from your own stupidity.  It’s your job to choose what banks to put your money in.  It’s your job to make sure that a bank is solvent, and that the assets in the bank are adequate.

And like a bunch of other promises that have been made by governments, this promise is a lie.  We need to understand, all of us, that we are responsible for our own future.  The idea that the “nanny” is going to take care of us is something that’s being exposed as a lie.  It was exposed in Cyprus and it will be exposed in other places as well.

A second, bigger issue, Eric, is the whole idea of government bank regulation.  You pointed out to me before the call that the British government is basically telling the British banks how much money to raise.  These regulators, these governments, are the very people who can’t balance their own budgets.  And now they are trying to explain to the banks how the banks should budget?  This is truly crazy.  We have a situation where the inmates are in control of the asylum.

Further to that (point), if you look behind the collapse of the Cypriot banks, what it had to do with was their investment in defaulted government bonds.  So you have the class that caused the banks to go broke, regulating how and in what the banks can invest, and how they can fashion their recovery.  This is like asking bank robbers to explain to the bank how to make up the shortfall that was a consequence of the bank robbers busting into the bank to begin with.  This is truly strange.

People need to take the whole range of lessons from Cyprus into account:  One, that ultimately, given the leveraged nature of the system, deposit insurance is just another social promise which won’t be able to be kept.  Two, that the regulators are completely incapable of balancing their own budgets, never mind managing a business as complex as banking.  Three, you need to have some of your assets outside of the system.  You need to own some things that they can’t print and regulate.  And of one my nominations for one of those things would be bullion, gold, silver, platinum or palladium.”

Eric King:  “Going forward, Rick, how can investors trust the financial system at all?”

Rule:  “I don’t know that investors should have the same degree of trust they had in the financial system.  For 20 something years the financial system has been an extremely generous place to live.  When I came into the business as a stockbroker in the mid-1970s, the period from the mid-1970s to 1982 was an absolutely steady move lower.  And the late part of the 70s, certainly with rising interest rates, presented a situation where many people in what was the strongest economy in the world, the United States, got wiped out.”