Big Trouble in Little Cyprus

 

Everything You Need To Know About the Cyprus Bank Disaster

 

People who watch the economic situation in Europe are familiar with the “PIIGS” (Portugal, Ireland, Italy, Greece and Spain) or the “peripheral countries” getting all of the fanfare for all of the EU’s problems, but EU member Cyprus has managed to slip through the cracks (for the most part) of the mainstream media’s attention.   I guess that’s understandable, considering it’s on the peripheral of the periphery, out there just south of Turkey in the Aegean.   It’s also statistically insignificant in the grand scheme of the EU’s GDP, but psychologically some kind of meltdown there can do some damage to the overall economy of the EU.

The economy of the island is based upon tourism, British ex-pats and offshore banking.   There’s a ton of money from Russia there, sitting outside the reach of the Russian government’s greedy little paws.    There also might be some offshore oil deposits, which might add an interesting twist to the story.    Banks in Cyprus have taken a beating over investing some of that capital into the Greek economy (Cyprus is mostly Greek).

The EU and Cyprus have recently agreed to a bailout plan that will cost the German taxpayers a ton of money and a levy on all bank accounts in Cyprus of 6.75% on accounts less than 100,000 Euros and 9.9% on accounts of more than 100,000 Euros.   The accounts with less than 100,000 are insured in a similar arrangement as our FDIC.      The banks closed on this news in order to avoid bank runs, as everyone naturally wants to get their money out of Cyprus.    The British government says it will reimburse British citizens and government employees (there’s a large UK military base on the island) with Cypriot accounts courtesy of the already-strained British taxpayer.

A lot of wealthy/powerful Russians stand to lose a lot of money via backdoor nationalization in this situation and they aren’t happy.   This is an interesting geopolitical wildcard here because who knows how Russia will respond to this.   On one hand, the government will be happy about all of that money potentially coming back home to Mother Russia.  On the other hand, Putin might have a lot of very powerful people insisting that they “do something”.    If things are looking like they’re going into crisis mode in the EU now, imagine what it would look like if Russia decided to shut off the gas to Europe – that would really throw them over the cliff.   I hope they tread lightly over there…

The other geopolitical factor here is Turkey, but this one might be a bit of a long shot.  The northern part of the Island is de facto Turkish with a strong Turkish military presence and Turkey is on the rise as a regional economic, political and military power.   We seem to be heading towards a multi-polar world I can see Turkey having more influence in the world in the coming years – not quite one of the big boys like the US, China, Russia or the EU, but maybe on the next tier or so down.

5-10 years ago Turkey was trying to jump through the hoops to get into the EU (under some admittedly degrading terms), but now it’s looking like both sides have lost interest in this idea and Turkey would probably be better off without being a member state.   Turkey’s role in NATO made sense during the Cold War, but no so much anymore.   Plus both Turkey and the rest of NATO have shown that they’re not 100% committed to each others’ national defense policies.   Turkey has been a thorn in the side of the US in Iraq and very reluctant militarily in Afghanistan (but good with humanitarian aid) and we haven’t been very helpful to our ally with their problems in Kurdish Iraq and we didn’t dare say a cross word to Israel when they attacked the Turkish flotilla to Palestine – I bet if Syrians attacked the Turkish ship instead of Israel, we would’ve been chomping at the bit to do something.

Oh yeah, there’s also a deep, pathological hatred between the Greeks (represented here by Cyprus who are Greeks in every sense but passports) and the Turks.  Things have gotten better between the two nations over the past few decades, but it’s still there.    Two years ago I visited the military museum in Istanbul and they had a room dedicated to the 1970 skirmish between Greece and Turkey in Cyprus.   A couple things that stood out to me was a satchel with a placard stating that it came from a “Martyred Turkish soldier in the Cyprus Peace Operation”.   There was also a display of an unassuming American army uniform but the name tag was a Greek surname.  It was just something that someone may have stumbled upon in a suburban Chicago surplus store and had absolutely no connection to anything with Cyprus.   To me this spoke volumes.    Oh, and right now the nationalist Golden Dawn party in Greece has been bringing up the Turkish boogeyman in their dialogue.   There was even a story that surfaced in the Western media earlier in the year about how the Golden Dawn put retaking Constantinople into their party platform although I think that had more to do with the media completely sensationalizing something from those guys than reality.    I’m sure many Greeks hold the romantic notion of the Ecumenical Patriarch rolling up to the Hagia Sofia in a tank to deliver the divine liturgy, but I really doubt anyone is putting that on the agenda in Greece.

I’ve gotten a little deeper with Turkey than I intended to when I started typing but long story short, I think there’s a real possibility of them doing something to assert themselves which will basically be their way of giving the EU and/or Greece the middle finger.

Back to Cyprus, this is a unique situation and I’ll be watching it to see what unfolds.   For all practical purposes there are all kinds of backdoor ways that governments can suck wealth out of the people, but this is notable because it’s so direct.   The thought of bank levies has never even crossed my mind.   Instead of dancing around the reality of the situation, it’s like they’re saying that everyone is going to take a bite of the proverbial shit sandwich.   Thinking optimistically, I guess it’s a good thing that they’re being honest.

Last time things really heated up in Europe there was a big rush into the dollar for security, so I’m wondering if gold and silver prices will go down tomorrow as presumably more European money will come our way.

I think this situation makes a good case for keeping some portion of your wealth outside the system into hard assets like land, precious metals and means of production.    It also makes a good case for keeping some physical cash on hand.   If I were in Cyprus, I’d rather grab some Euros from underneath the mattress right now than worry about standing in lines or trying to track down an ATM with cash still in it.

 

See also  The Case for Keeping A Little Extra Cash Around

 

 

 

Detroit: Too Big To NOT Fail

Detroit: Skid Row

I doubt anyone is surprised to hear that Detroit is in deep shit right now.    That’s been common knowledge for quite some time now, despite the perennial “Detroit is experiencing a renaissance” articles in the media.   To be fair, occasionally I do hear about some good things happening in Detroit at the neighborhood level from time to time, especially in the way of urban farming and restoring abandoned buildings.

So basically what’s happening now is that they’re finally acknowledging that the situation in Detroit is out of hand.   The city has about $14 billion in unfunded liabilities (pensions, health care benefits, etc) and about $2.3 – $2.6 billion in annual revenues, which doesn’t cover their current expenses, let alone the debts and liabilities.    It looks like the state is going to step in and suspend the powers of the Detroit City Council and the Mayor in order to try to get things straightened out.    Detroit as we know it today is a failed city.   It’s a tough pill to swallow that these kinds of places exist in the omnipotent United States of America, but that’s reality.

State of Michigan Debt Clock

The rest of Michigan isn’t doing so hot, but I assume that a lot of the state is doing better than Detroit and Flint.   The state is about 125 million in debt, representing a little over $12,000 per resident.    This article from The Economist points out that this move is going to make a lot of people angry – there’s a big cultural and political divide between Detroit and the rest of Michigan and I’m sure the anger is going to go in all different directions over this.    People from Detroit (who tend to be black and democrat) aren’t going to like the state government (currently republican) calling the shots ethe rest of the state (which is mostly white and a little more conservative-leaning) isn’t going to be thrilled with bailing Detroit out while things are tight for them as well.

In The 2012 Election and the Elephant Outside The Room I mentioned that in a short period of time I think there will be some real talk of states wanting to split up one way or another.    Detroit and Michigan might be the most likely candidate at this point, although Northern California has been whispering about parting ways with Southern California for years.

It will be interesting to see what happens with Detroit in the next few years as there probably won’t be able to pull off any magic tricks and fix Detroit’s problems.   There are some different dynamics at play, but when the subject of municipal and state debts come up, it’s often pointed out that many of the states that are in trouble right now have economies the size of European countries.    Michigan’s economy is bigger than that of Greece.   If a major city goes down and brings the state down with them, what happens then?   We don’t know, but I’m sure we’ll see in the next few years.

I’ve never even been to Detroit, so I feel kind of silly saying what’s best for Detroit, but it really sounds like Detroit’s future isn’t in “Detroit”, but rather in a series of smaller communities.   By all reports a good portion of the city is already vacant.   If you go to yahoo or google maps and look at Detroit, there’s a lot of open spaces in the residential areas of Detroit’s inner city.       When/if the city government fails, it makes sense for communities within Detroit to pick up the pieces and go at it without them.   Honestly, it would be difficult to run a municipality any worse than Detroit’s leadership already has.   That’s probably the best way to get out from underneath the unsustainable debt of that city.

Whenever I come across articles about Detroit, I always read them.   It kind of fascinates me.   It sounds like everything is already in place to start devolving into a series of smaller communities already.   Occasionally you read about “urban pioneers” from the suburbs revitalizing one little pocket of the city, an ethnic group establishing a viable section of the city or a small inner-city area getting together and cleaning house.   Everyone might be better off starting from scratch instead of trying to keep the whole shit-show going.   Nothing lasts forever, especially municipalities.

It is cool to see examples of dilapidated buildings getting restored or communities within Detroit find some reason to wake up in the morning.   As I understand it, in the 50’s Detroit was basically America’s model city with a very prosperous middle class, a ton of cultural amenities, great architecture and so forth.   Returning to those days probably isn’t in the cards, but it is possible to create vibrant communities within that patch of land.

People that like history usually have a few events or periods that they’re really into.   One of mine is the fall of Constantinople.   Reading about Constantinople before the Turkish siege sounds a lot like Detroit – most of the prosperity was gone one way or another, they were deeply in debt, crime and depravity ran wild and large tracts of the once-great city reverted into farm plots, vineyards, orchards and open space.   The city had the feeling of a series of small villages instead of one grand city.   When the Ottoman Sultan Mehmet II finally made it past Constantinople’s gates he was a little let down with what he actually saw in the city as it was a far cry from it’s glorious legacy.

At any rate, I’ll continue to watch the news from Detroit.   The city’s plight is nothing new, but at some point they’re going to hit a breaking point (or magically solve their problems) and there could be greater implications for the rest of the country when/if that happens.

 

The Queen of Versailles

 

Wow.

I watched this documentary tonight.   It’s about time share mogul David Siegal and his trials and tribulations over the past few years.     It appears that they started making the documentary before the crash of 2008, when they were an extremely wealthy family that was in the process of having the largest house in the United States built.    The final cost of the house was estimated to be in the area of $100 million and was made to vaguely resemble Louis XIV’s Versailles palace in France, after getting inspiration from visiting said palace.   They named the house as “Versailles”, thus the name of the documentary.

When everything started crashing down in 2008 Westgate, Siegal’s company, lost access to the easy credit they depended on.   Revenues from timeshare payments dropped as many people around the country had a hard enough time making the payments on their own homes, let alone a share of a penthouse in Las Vegas.    Siegal’s business was built on the premise that the cash flow would keep coming in and there would always be someone willing to loan them money based on that cash flow.   When the downturn hit, Siegal was left with his dick in the wind as his assets declined in value, cash flow dropped and his debts remained the same.  He went from being on top of the world to being in an extremely precarious situation within a very short period of time.

His large family had to make some meaningful cutbacks in their household, such as cutting down their staff of maids from 19 to 2.   Over the course of the year or so they followed the family around you can see the household turn into complete disarray and the family structure break down as David Siegal spent most of his time in an office surrounded by stacks of papers trying to figure out how to get out of this mess.    I don’t demonize success and wish ill-will on people that have more than I do, but I have to admit it’s kind of funny to watch these guys completely unravel.   The hubris of this guy is unreal plus he’s in kind of a scummy line of work.

I’m not sure if I have my numbers right, but I think the family sunk about $40 million into the house and took out a mortgage on the remainder.   That $40 million bought them the land and a good portion of the structure and that’s as far as they got.   Siegal said he didn’t pay cash for it because he figured he’d keep having money flowing in and he’d rather put it into his business.   That’s generally not a bad idea, but this is certainly a case of counting chickens before they hatch.    After everything started coming apart for the guy, the bank insisted that he put the house on the market.   Finding someone willing to buy a house like that isn’t exactly an easy chore, let alone for a price anywhere near what they borrowed.  In fact, I think it’s still on the market and unfinished.

One thing that struck me throughout the documentary is how they kept insisting their their troubles were temporary and there was a way out of it.   He spent a lot of his waking hours trying to source financing.   He kept saying “all we need to do is buy some time” and he found a few ways to kick the can down the road a little bit.   His son was the VP of the company and at a certain point everybody’s pay had to be slashed (and 6,000 employees let go).   When they interviewed his son I thought it was noteworthy that he said that he had to ask his dad for money due to his low salary, which his dad declined.  He said to solve the problem he maxed out his credit cards and took out a home equity loan to get him through it.   Some people never learn…

Siegal built his business by luring in naive middle class folks in with free stays, entrance passes to Disneyland, etc. as long as they listened to the presentation.   I got the impression that they signed up just about anyone who could fog a mirror.   In one scene he rants about how the bankers were a bunch of vultures, which is kind of funny coming from the HMFIC of one of the most bullshit industries out there.   What goes around, comes around.

I just stumbled upon this on Netflix and hadn’t read anything about it, but I’m sure there’s a ton of comparisons to Citizen Kane and Xanadu out there.   I also think it’s interesting that the real Versailles pretty much sent France over the brink, just like this house did to this family (and maybe the company).   Off hand, I think I read that the palace of Versailles cost about 40% of the total GDP of France when it was built.   FWIW, tourists from all over the world now come to see the pinnacle of Gallic opulence so at least it’s giving something back now.   I’m sure the Versailles Chambre de Commerce is at least glad it’s there.    On a side note, now that it’s in my mind I bet that within 20 years Versailles will be purchased by Chinese businessmen or something like that.

I think that if future historians look back to the current economic situation, this very well could be one of the defining historical works of the time by the way it shows how well they were able to live on borrowed money and then how far they fell when they were reduced to their true assets.   I really could see future economists throwing around “Versailles” as one of those historical anecdotes like the tulip mania.   If things really go south for us, I could see this house used as an example in the future of the highest levels of economic and ecological arrogance of our time.

There are too many lessons to be learned and examples of how not to run your life in this documentary to even list.    You name it, it’s probably in there.

 

Debt and Economic Woes in Argentina: Is Collapse Looming?

Argentina Grounds President’s Plane

Argentina Orders Crew to Quit Libertad Ship Held in Ghana

 

 

Argentina is a country that should be a lot better off than it is.   They’ve got great farmland, tons of mineral resources, access to big enough markets and a fairly well-educated and savvy populace.   At the beginning of the 20th Century Argentina was one of the richest nations in the world and Buenos Aires was considered one of the most elegant cities in the world, “the Paris of the Southern Hemisphere”.    You can still see the evidence of the city’s past grandeur in its stunning architecture, although time and neglect has certainly taken it down a few notches.

Argentina experienced major economic upheaval in 2001, following the crash of the American stock market and they’ve never completely recovered to the same level as they were before the crash.  There was a pretty big socioeconomic divide between rural and urban Argentina, but overall there was a large middle class that more or less had a first world standard of living.   For more on the 2001 crash, Fernando “Ferfal” Aguirre wrote a preparedness-minded book on his experiences during that period (The Modern Survival Manual: Surviving the Economic Collapse) and there’s a good documentary on Youtube:

Anyways, things have been heating up down there again.   Before 2001, the Argentine Peso was pegged 1:1 to the US Dollar.   It went to 4:1 after the collapse and I think it stayed somewhere in the area of 3:1 in the following decade.    Today it’s five pesos per dollar.   They’ve also put currency controls in place that make it so that pesos can’t leave the country in order to avoid massive capital flight.   A guy I know that was down there in the past couple of months said that there’s definitely something in the air down there these days.

I’ve noticed two stories in the news over the past couple months about Argentina.   In October their naval training vessel ARA Libertad was seized in as it docked in Ghana as collateral for the nation’s creditors.   The other involves Argentine President Cristina Kirchner grounding the state airplane Tango 1 (think Air Force One) and taking a charter plane to make a few trips around the world in order to keep it out of the hands of Argentina’s creditors.      The ARA Libertad isn’t just any old ship; it’s largely ceremonial and used to train naval cadets from Argentina and other nations.   Technically it’s a warship, but it’s mission is more diplomatic than anything and it’s supposed to be a symbol of pride for Argentina.     It’s kind of a cool looking ship:

Libertad 1
As far as Tango 1 goes, I’m sure it’s a very nice plane but it would be a real kick to the balls for any state for their leader to have to hitch a ride home after getting their plane snatched away from them.   Both of these events have to be very demoralizing to a country that can never seem to stay ahead of the curve.   I wish them the best of luck down there, but it doesn’t look good.

I think these stories from down south are notable to us because it goes to show that past performance doesn’t always guarantee future results.   Who would have believed back in Argentina’s glory days as one of the world’s wealthiest nations that someday one of their ships would be seized in an African port as collateral on debt?    It also shows that actions have consequences and sometimes the piper has to be paid.   If you owe people money, it will come back to bite you in the ass one way or another.   Another theme in these stories is that although the head of state might more or less rule the roost in their own country, there’s only so much they can do outside of their borders.  There’s no “they can’t do that to ….!” here  because yes “they” can.

Although there are some fundamental differences between the US and Argentina, I think it is an interesting case to follow because it is an example of what an advanced, modern economy looks like when things really go sour.   We’re well over our heads in debt but hopefully we can pull our heads out of our asses before we end up in a situation where we have to worry about having assets seized abroad like Argentina.

 

 

How Much Is A Firefighter Worth?

How Much Is A Firefighter Worth?

 

 

A couple months ago I decided that I was going to cut down the amount of financial programs I listen to.   I admitted to myself that I was spending a lot of time being told about how bad things are, how the system is rigged and how there’s a looming catastrophe just around the corner.  I get it.   I’m already taking measures to deal with the possibility of going through some hard times.   I’ve been putting that podcast time towards other things I want to learn about.   There’s only two financial podcasts I listen to regularly.   One is Follow The Money Weekly.   I think this one is good because it’s more proactive than reactive and I learn a lot from it.   The other one is NPR’s Planet Money.  Planet Money is cool just because it’s almost always really interesting and informative.   It’s the kind of show that after it’s over you can turn to whoever is next to you and talk about what you just heard.    The link is to a Planet Money podcast that I heard a few weeks ago.

Here’s the condensed version of the story:  A long time ago the city  on Contra Costa, California made promises to the firefighters that they would receive a set percentage of their final pay as their pension.   When they made that deal the city assumed that their tax revunes were going to keep going up and up and they would be able to foot the bill for not only the current fire department, but the retirees as well.   That growth that they counted on didn’t happen and the city is stuck with a huge bill for fire services and pensions.

Some in the city are claiming that that since the majority of calls the firefighters go out on are of a medical nature instead of fires, they can get away with a lot less.   One commenter in the blog (who says he is a firefighter) points out that the increase in medical calls reflects a growing dependence on emergency medical services as primary care among the poor/uninsured and not necessarily a decrease in fires.    The commenter also brings up the fact that when a fire does happen, everyone is going to want the right amount of firefighters on hand and cuts in staff can make it difficult for the firefighters to do their primary job.

After a lot of talk between the city and the union, they came up with the idea of putting out a ballot measure for a $75 across the board tax increase to help fund the firefighter’s pension fund.   They needed a 2/3 vote and ended up short of that, so the measure didn’t pass.   Now they have to make some very deep cuts in fire service in order to make up the shortfall.

While this is the story of just one American town, I think it reflects a few themes and growing trends:

–  We tend to count our chickens way before they hatch and probably assume that one of those chickens is going to lay a few golden eggs.    I think the idea that everything is just going to keep going up and up is too deeply engrained into our financial workings.  Unfortunately reality is something completely different and assuming that the future is going to be like the past can be dangerous.

–   As a society we want more things than we’re willing to pay for.   That’s understandable – who doesn’t want more than what they pay for?   I always like to get a good deal on things.   I like the idea of putting a tangible amount to the measure and putting it out to the public on what things actually cost per household.   I would love to see a website that had goverment expenditures on everything broken down to per capita, i.e. “we spend X amount per person on foreign aid to Djibouti and Y on the military presence in Korea”.   It’s easy for us as citizens to say “they should do this” and “they should do that” when we’re not directly seeing the bill but if we actually saw the costs I think the conversation on a lot of things would be a lot different.   By putting out the costs you’re not exactly making judgments on whether or not it’s a good deal, but you’re letting the taxpayers theoretically decide whether or not they think it’s a worthwhile expenditure.    The elephant in the room on that subject is that a lot of those expenditures get passed on to future generations through government debt.    At any rate, I think most people are really disconnected from what things actually cost.  I think sometimes people think that these decisions to cut services are made just because someone has a spiteful heart and wants to make their life miserable rather than fiscal reality.

–  To use another colloquialism, a lot of our financial system really seems like a giant game of hot potato.  Just keep passing it on.   Eventually it’s going to get too hot for someone to hold.   The US government can always print money, cities can issue bonds and raise taxes, but someone has to be willing to buy those bonds and raising taxes could chase away people who would otherwise pay in.   Das FedGov can unload every bond they issue to the Federal Reserve.      I went a little deeper into this subject (and some of America’s muncipal/state debt woes) in this article:   Scranton Mayor Slashes Pay For All City Employees to Mininum Wage – Austerity Comes To America

–   Unfortunately it’s easy for politicians to make deals that they won’t be around to take the heat for.     This kind of ties into the “people want more than they’re willing to pay for” idea.    Sometimes tough decisions don’t make good material for reelection campaigns.

–  I think we’ll be seeing more of this in the years to come as local governments are going to have to keep making cuts in order to stay afloat.   People aren’t going to like it, either.    At the end of the day, there’s usually only so much money coming in and only so much you can do with it so difficult decisions will have to be made.   When a city gets over the head in debt, they’ll go to the county.  When a county gets in over their head, they’ll go to the state.  When the state is over their head, they’ll go to the federal government.   The economies of many US states are quite large (especially California and Illinois – two states in a lot of trouble) so a state going under will probably have a big effect on international scene, just like Greece has been.     People around the country and within states aren’t going to be happy about bailing out other cities/states.    Should be an interesting ride…

 

 

 

 

Working Poor: Almost Half of US Households Live One Crisis From The Breadline

Working Poor: Almost Half of US Households Live One Crisis From The Breadline

 

One of the best definitions for assessing one’s wealth I’ve heard was how long you could go without a paycheck – I think this one is better than determining one’s wealth by their salaries or the consumer goods they own.   Many people with high salaries struggle to make the mortgage payments on the McMansion, the payments on two SUV’s, credit card payments, student loan payments and other costs associated with that lifestyle.   On the other hand, there are people with moderate/low salaries that have managed to accumulate notable savings and assets through diligence and discipline and thus have a more secure standard of living than a hyperconsumer with a high salary who may see their world crash down around them in the event of unemployment, a reduction in income or even a significant expense (say, killer medical bills, unexpected sewer work, etc).

If you haven’t made it a goal of yours already, you should strive to become wealthy per this definition.   Some say you should make a point to have six months to a year’s worth of expenses squirreled away in the event of emergencies.   I know that sounds like a daunting figure, but that figure can be reduced (and voila, a surplus created!)  by making meaningful cuts to your monthly expenses, finding ways to conserve resources, storing food and supplies purchased at opportune times and learning to do things for yourself.   Slowly but surely you’ll build a safety net and steer clear of the breadline should something happen… and if you don’t experience a personal financial crisis, you’ll still sleep better knowing that if one did happen, you’ll be able to make it through.


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