Let me begin this column by correcting an error in my last column. In the second paragraph I made the statement that GM took 50.2 million taxpayer dollars. What I should have said was that GM took 50.2 billion taxpayer dollars. This makes my calculations on dollars spent per job accurate. Thank you, my readers for pointing out the error.
This last week was a textbook case for a common thought process when it comes to investing, buy the rumor and sell the news. Late last week we started to hear noise that Spain was going to ask for a bailout in their banking system — The rumor. Over the weekend we got the word that Spain did indeed ask for a bailout and it was going to happen — The news.
On Monday after the market opened we got an initial bump up until all of the news was digested and then the market dropped.
This week is more of the same in that the Greek elections are going to happen on Sunday. There are many rumors going around as to which party is going to the get the majority and form a new government. The speculation revolves around who wins the majority; will it be the party that believes in austerity measures or the party that wants to keep the status quo of borrowing and spending.
The reason people buy the rumor is just in case it is true they don’t want to be left out if the market goes up. Then they sell the news because most of the time, no matter what the news is, it doesn’t measure up to the hype of the rumor.
The fact of the matter is that no matter what happens in Greece this weekend they are still in big trouble financially and will probably leave the Euro so they can inflate their way out of the debt.
The people of Greece see what is going to happen and have been withdrawing their money out of the banks to the tune of 125 million dollars of Euro’s a day. The government is getting very desperate for funds since the tax collections are way down in recent months. To this end, the Greek government has taken to simply pulling funds directly out of citizen’s bank accounts, if they are suspected of being a tax cheat.
Italy is even worse in that they have frozen people out of the accounts totally. No ATM withdrawals, no bill payments, nothing. Just locked out overnight.
These actions are what are known as capital controls. These controls restrict the free flow of capital into, out of, through and within a nations border. Can you say “Ex-patriot act”?
Capital controls can take many forms. For example:
Withdrawal limits, either amounts or timelines
Forcing banks and/or citizens to hold government debt.
Criminalizing the purchase and ownership of precious metals
Fixing an official exchange rate.
Criminalizing market-based transactions.
Very quickly, capital controls eliminate most of your liberty and generally makes your money worthless. The completion of capital controls essentially makes the citizen a slave since you no longer have free access to your money and you cannot barter for anything without breaking the law.
I am often asked why I spend so much time talking and writing about the European situation. It is because this is the path we are on, they are just a few years ahead of us. We have time to avoid this disaster. We need to have the right leadership in Washington, D.C. and, more importantly, we need to have individual leadership.
We, as individuals, need to educate and be aware of what is happening over there so we can recognize it happening over here. What would you do if all of your accounts were frozen at the bank? Do you have an alternative medium of exchange? Important questions to be sure.
In the coming weeks we will answer some of these questions. In the meantime, hope for the best but prepare for the worst.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD.
