The financial turmoil in Cyprus is an unpleasant reminder of how little control we have over our assets, especially in the age of technology. We don’t want to think about it, but the truth is that something similar could happen in the United States or Canada – and that’s scary. Personally I’m not too worried about that happening and I’m not too interested in drastic measures to protect my assets (you’ll understand why below). But I think it’s always valuable to acknowledge what is possible and to consider your options.
The Situation
If you haven’t been paying attention, here’s what’s happening in Cyprus: the government needs a bailout, and they’re considering funding that bail out by taking money out of bank accounts held in Cyprus. So, imagine a situation where bailout is needed in your country. You have money in the bank, and they’re going to take some percentage of it (let’s say 10%) to fund the bailout. How would you feel about it, and what would you do?
For the people with money in Cypriot banks, there’s very little that can be done. Banks have been closed, and transfers have been effectively shut down because they know that all of the money will head for the exits. For now, let’s stay away from the topic of whether not this tax is a good idea, where the money really came from, and so on – let’s stick to the topic of how you would feel about this and what you would be willing to do to protect yourself.
If this situation were to materialize in the United States, there are several ways you could protect yourself. But here’s the catch: you would have to do something ahead of time. You’d have to commit to a course of action and deal with the consequences whether or not a bailout tax ever became a reality.
Gold
One solution that you hear a lot about is gold. If, instead of putting your money in the bank, you had bought gold, a bailout tax on bank deposits would not be a problem. The government would not know how much you have, nor would they know where to find it, so you’d be in good shape.
On the other hand, gold is not as easy to use as cash and a bank account. What if you want to buy something? You can’t write checks against your gold, or swipe a card at the grocery store. You need to either convert it to cash, or deal with somebody who’s willing to accept gold (hopefully you have exact change). There’s also the question of safety. Where will you store your gold? If you hide it somewhere, will you remember where it is? What if you die – will your loved ones know where it is? Of course, questioning gold’s safety is tricky because bank deposits are not safe when they get seized by the government.
The question of risk is similar. Gold prices fluctuate, sometimes violently. And gold has been doing pretty well lately – does that mean it’s ready to take a break and come back down? Who knows? Cash, of course, is cash. You pretty much know what it’s going to be worth. However, the value of the dollar might differ from the value of gold, and those values might move in opposite directions – especially if your country needs a bailout.
As you can see, using gold comes with complications, but some people have decided that they prefer to use gold for their savings. I’m not one of those people, but I see where they’re coming from.
Other Investments
If a tax on bank deposits is the government’s solution, would you be better off with different types of investments? What if your money is invested in the financial markets (at a brokerage house or a mutual fund company, for example)? You have to imagine that if the government is willing to go after bank accounts, they might be willing to go after other types of accounts as well. What’s to stop them? Now, in the case of Cyprus, you could argue that they are going after bank deposits because the banks were taking risks and because the money is of dubious origins anyway, but any liquid account seems too close for comfort.
Illiquid investments might just work. You don’t hear about them taxing people based on the value of their homes (although property tax is certainly common in many places). If it’s harder to get to the money, these types of ham-fisted approaches (bank account “taxes,” that is) might not be much of a problem. An ownership interest in a business might be similar: you don’t have a pile of cash sitting there waiting to be taxed, it’s just a claim to the assets and income of the business.
Again, I’m not sure how practical it is to live without liquid accounts. They provide an easy way to manage your money, and investing in a business means lots of risk. All of your eggs are in that basket, and it’s not easy to get cash if you want it. With mutual funds, you can easily diversify and turn your investment into cash.
Phantom Bailout Taxes
Ultimately, it might not matter much which approach you take because a similar “tax” might not ever materialize. There are other ways to pay for bailouts. Plain old income taxes might do the trick, or government spending (followed by inflation) is another way for a country to get back on its feet. Depending on how sneaky and sophisticated the politicians want to be, it might not look like a bailout at all. My hunch is that politicians in the United States would favor one of these more sophisticated approaches – that’s how they’ve done it up to this point – so at the moment I’m not worried about keeping assets in liquid accounts.