Texas Enteprise Speaker Series, May 9, 2013, The University of Texas at Austin. The Cypriot bank deposit crisis has put a modern spin on Mark Twain's "It's not the return on my money but the return OF my money that counts." The unthinkable possibilities ahead emanate from the epic gap between a government's financing needs and its ability to sell debt. This has prompted politicians to consider options that were previously considered unthinkable. You will learn — The magnitude of the shortfalls in government funding
 The adverse effects of the monetary fixes that are already underway
 The means that governments use to confiscate private wealth
 The protections being devised by private citizens
 The possibility of new reserve currencies and global wealth reallocation The Texas gold depository as an example of the unthinkables that lie ahead.

1. The
Cyprus
Bank
Deposit
Confisca5on:
Is
Your
Money
Safe
Anywhere?
May
9,
2013
Professor
Lew
Spellman
www.TheSpellmanReport.com
SPEAKER SERIES

2. Visions
of
the
Columbia
Space
ShuMle

3. Can
It
Happen
to
an
Economic-­‐
Financial
System?
• Typically
not
vulnerable
to
a
cyclical
event
becoming
a
meltdown
• Natural
Dynamic
Equilibrium
Self
Correc5ons
–
usually
via
prices
• Policy
Correc5ons
mainly
fiscal
and
monetary
policy
• Monetary
Policy
is
Discre5onary
and
frequently
changed
• Analog
computer
simula5ons

4. Policy
Can
Destabilize
an
Economy
• Economic
systems
inherently
more
resilient
to
shocks
(than
space
craZ,
but
economies
do
“crash”
(Dynamic
Instability)
• Europe
does
not
allow
wages
to
fall
or
the
currency
to
cheapen
so
Greece
and
Spain
have
no
natural
correc5on
• Fiscal
Expansion
or
Austerity?
• Zero
Interest
Rate
Policy
is
a
destabilizer

5. Why
and
How
Did
the
US
Become
Vulnerable?
• Why:
50
years
of
sustained
growth
created
a
sense
of
perpetual
growth
• Led
to
“Shared
Prosperity”(En5tlements)
• Financial
Guarantees
Thought
to
be
Costless
Subsidy
• Too
much
debt
to
date
– Past
the
“R&R”
“Bang
point”
(seeng
off
the
downward
dynamic
process)
• Far,
too
much
commiMed
government
spending,
mostly
en5tlements
over
the
next
40
years
implies
more
debt
• Demographics
hurt
badly
• Poli5cal
Process
Didn’t
Want
to
Know
How
Much
it
all
Cost

6. Tax
Revenues
vs.
Debt
Last
6
years
7 Trillion
6 Trillion
5 Trillion
4 Trillion
3 Trillion
2 Trillion
1 Trillion
100 Billion
US Growth in Tax Collections US Increase in Debt
Over 6 Yrs. = >$100 Billion Over 6 Yrs. = >$7 Trillion

7. US
Deficits
and
the
Growth
of
Debt

8. Interest
Cost
of
Large
Scale
Deficits
as
a
percent
of
GDP

9. When
an
Economy
“Crashes”
What
Happens?
• Government
Default
on
its
debt
• Financial
Prices
Crash
• Banks
Fails
• Capital
flight
• Unemployment/Bankruptcies
• AZer
geeng
through
na5onwide
bankruptcies
• All
resources
now
cheap,
currency
cheap,
liMle
debt:
Start
again

10. This
is
Not
Uncommon
• Mexico:
1983,
1994
• Argen5na
today
(has
not
reached
boMom)
• Asian
Contagion:
1997
• Russia:
1998
• Greece:
2011
• Iceland:
2010
• US:
We
are
extremely
vulnerable
and
not
exempt

11. How
Does
Treasury
Sell
Risky
Debt
• Cram
it
down
the
throat
of
the
financial
ins5tu5ons
via
regula5on
or
incen5ves
– Banks
– Insurance
Companies
– Pension
Funds
– Money
Market
Mutuals
– Hedge
Funds

12. Laying-­‐off
the
Debt
on
Central
Banks
• Central
Banks
“large
scale
asset
purchases”
beMer
known
as
Quan5ta5ve
Easing
(QE)
• Fed,
ECB,
Bank
of
Japan
all
doing
it
• Paying
for
it
with
money
or
claims
on
money
• While
they
claim
it
is
a
cyclical
economic
policy,
it’s
a
secular
debt
support
policy
• Induces
Other
Central
Banks
of
the
World
to
do
the
same
via
the
2-­‐
part
process
called
“Currency
Wars”
– Limit
the
apprecia5on
of
their
currency
by
selling
their
currency
against
the
dollar
– Keep
on
Expor5ng
to
the
US
(run
trade
surpluses)
– Buy
Treasuries
with
the
dollars
so
US
doesn’t
impose
trade
sanc5ons
– Last
year
$555B
of
the
$1.2
Trillion
was
Foreign
Official
purchases

13. Now
Its
Your
Turn:
Government
Debt
Crammed
onto
Your
Balance
Sheet
• Proposals
for
the
Government
to
take
over
or
manage
your
IRA
or
401k
account
(State
of
the
Union)
• “Guaranteed
Re5rement
Accounts”
Two
versions,
turn
in
your
IRA
or
supplement
it
• Now
CFPB
is
seeking
to
“protect”
consumers
by
managing
your
investments
to
“safe”
Treasuries
• Read
The
Feds
Want
Your
Re5rement
Accounts
• Its
actually
easy
for
the
US
to
tax
your
IRA
by
changing
the
amor5za5on
schedule
by
which
it
is
taxed

14. Conclusion:
Government
Debt
Problems
Become
a
Private
Wealth
Tax
• Your
“bank”
(insurance
co.
etc.)
assets
go
down
and
banks
goes
down
and
the
government
financial
guarantee
can’t
be
fully
honored
• Currency
falls
in
value
(Bill
Gross:
Sell
Currencies
of
Serial
QE
Offenders)
• Infla5on
depreciates
the
value
of
fixed
income
assets
• Wealth
Confisca5on
(Bill
Gross,
Haircuts)
• Explicit
One-­‐Time
Wealth
Tax
26%
(BCG)

15. Another
Stealth
Tax
• Financial
Repression
=
Very
low
market
rates
and
posi5ve
infla5on
• Lowers
real
cost
of
carrying
debt
for
the
gov’t
debt
issuer
at
the
expense
of
the
holder
• No
compensa5on
in
yield
for
the
risk
of
default
or
generally
rising
yields
due
to
infla5on
or
end
of
QE
• Major
loss
of
the
market
value
of
government
bonds
if
interest
rates
rise
• Ten
year
Treasury
bonds
decline
31%
in
market
value
if
market
yields
climb
to
normal
5%
• All
ins5tu5ons
hold
debt
whether
government
or
private
and
are
affected
and
many
prospec5ve
re5rees
hold
them
for
“safety”

16. Treasury
Nominal
and
Real
Yields
Not
Enough
Return
to
cover
the
risk
of
falling
market
prices
or
infla5on

17. All
5me
low
yields
with
lots
of
risk

18. How
Cyprus
Bank
Depositors
Went
Down
• Banks
bought
“safe”
Euro
Zone
government
bonds
• When
Greece
Defaulted,
assets
declined
below
deposits
and
other
debt:
This
is
insolvency
(more
debt
than
assets)
• Cyprus
had
commiMed
to
recapitalize
banks
• Needed
Rich
Uncle
assistance,
but
Germany
and
the
Dutch
decided
enough
was
enough
• Bank
Regula5on
requires
solvency
and
without
it
liquida5on
follows
• In
Bankruptcy,
assets
are
liquidated
to
pay
off
claimants
in
order
of
priority
• Government
could
NOT
make
good
on
deposit
insurance
to
cover
depositor
losses
• Deposits,
what
were
leZ
had
a
capital
ouwlow
restric5on
(from
bank
and
country)
• Tossed
out
Rule
of
Law
since
the
1930s
order
on
order
of
priority
• The
new
“template”
Its
now
buyer
beware
• Is
the
FDIC
any
beMer
prepared

19. Geopoli5cal
Reac5ons
• Countries
Will
Seek
to
Insulate
Themselves
– Germany
Will
No
Longer
Be
the
Rich
Uncle
of
Europe-­‐there
will
be
separa5on
(drop
out
of
Euro
party
gaining
trac5on)
– Foreign
Central
Banks
are
not
so
eager
to
support
US
Treasuries-­‐switching
to
suppor5ng
their
own
equity
markets
– BRIC
Countries
seeng
up
their
own
payments
systems
to
avoid
holding
the
dollar

20. The
Geopoli5cal
Opportunity:
Capital
Safe
Haven
at
a
Price
• Countries
Lining
Up
to
be
friendly
to
foreign
flight
capital
• Safe
haven
countries
can
charge
for
being
the
safe
haven
(the
Brazilian
2%
capital
inflow
tax)
which
improves
their
fiscal
picture
• Switzerland
losing
ground
to
Singapore
• China
gold
accumula5on
and
transac5on
currency
agreements
likely
leading
to
a
world
reserve
currency
that
is
gold
backed
• Canada
and/or
Australia
but
at
the
cost
of
trade

21. Texas
State
Gold
Depository
• Both
a
haven
and
in
a
wealth
form
that
stands
up
to
sovereign
default
and
infla5on
• Individually
owned
gold
stored
at
a
cost
held
in
the
name
of
the
state.
A
Texas
source
of
revenue
(my
guess
it
will
bear
2%
fee
per
year).
• Cons5tu5onal
protec5on
from
US
confisca5on
• State
Guarantee
makes
it
a
beMer
product
than
private
depositories
• Will
Lead
to
a
Global
Wealth
Preserva5on
Industry
in
Texas
• Did
someone
say
the
“S”
word?

22. Individual
Protec5ons
Being
Devised
• Off
shore
trusts
• Swiss
Annuity
type
products
– Taxable.
but
Tax
Friendly
• Seek
Managers,
Lawyers,
Financial
Planners
,
and
Tax
Advisors
who
understand
global
risks
presented
by
government
financial
strains

23. Follow
Up
Presenta5on
• Global
Estate
Planning
Lawyer
and
Other
Professionals
Will
Discuss
–
sign
up
to
be
contacted
at
registra5on
on
way
out
or
leave
business
card

24.
sign
up
and
send
to
a
friend