Do you remember? The IMF set off the public and the media in October by stating in a report that it would be a great idea to invoke a one-time levy on the savings of the public to get governments' finances in the industrialized world back on track. That message or that 'theoretical exercise' as the IMF called it then, did not sit well with most people and it resulted in a media frenzy. A few weeks later they did try and failed at damage control, which was nothing more than public embarrassment. Meanwhile we have reached 2014 and yes, we have a new document commissioned by the IMF, from two Harvard economists, Carmen Reinhart and Kenneth Rogoff.
IMF: high time for financial repression
Both Harvard economists are not beating around the bush. The idea that the mountain of government debt in the industrialized world is controllable and can be solved over time with enough economic growth is completely unrealistic. Next to that it appears that politicians are suffering from collective memory loss. In Europe and the US, in the period between both World Wars, countries also defaulted. The current mindset that defaults are only reserved for Emerging Markets is completely incorrect, according to Reinhart and Rogoff.
Both economists state that the mountain of debt from the industrialized world is at the highest level in the last 200 years. And that is a problem, a problem which cannot be resolved by economic growth exclusively. The Eurozone's debt amounts to 95 percent of its GDP and the US is almost at 110 percent. Ultimately, the Eurozone is not that far behind at the rate at which debt is growing. You can bicker about the level at which debt is impossible to pay back, but the consensus is that this lies somewhere between 90 and 100 percent for the industrialized world, because of its low growth figures (1 - 2.5 percent).
'Fortunately', both Harvard economists have a turnkey solution. Before we get into the details we want to emphasize that this report is commissioned by the IMF. That gives the IMF at least the possibility to distance themselves from its contents, if hell breaks loose once more. For now it remains quiet, however. Most media channels, and especially the MSM, did not pick up the (at least to us) explosive report. In these financial times, nobody appreciates sleeping journalists we would think, but who are we to judge.
Back to both Harvard economists and their 'solution' for the government debt, which has increased beyond belief. The solution is very simple: financial repression. It does not sound pleasant and it isn't indeed. It is a cocktail of: (higher) inflation, capital restrictions, default and a savings tax.
Let that 'solution' settle in your stomach. It does not sit very well does it? Again we have the cursed savings tax, again the absurd capital restrictions. And according to both Harvard economists, a form of restructuring (default) of debts that have gotten out of hand should come on top. Probably you, as an investor/saver do not own government bonds, so you do not lose sleep over all of this. Well, that might not be so smart: the odds are high actually, that you are building your pension, and subsequently, the odds are high that your pension fund does own government bonds.
IMF thinks it is smart
The question is: what do we do with all of this? What do we do with an IMF, led by a highly accredited, charming lawyer, who just played the same old trick on us? First the organization starts with a 'theoretical exercise', only to deny completely that the IMF is aiming for your savings. And now this report, commissioned by the IMF and from the hand of two not undisputed Harvard economists, which features once more the savings tax and capital restrictions.
Does the IMF truly believe it gets away with this? Having a report written by two Harvard economists, that have made crucial calculation errors in an earlier report 'Growth in a Time of Debt'. And despite that the report was happily used by Olli Rehn, the financial head honcho of the European Commission.
Watch your savings!
Let us put forward that we also believe that the government debt has gotten out of hand in many countries. On top of that there is a whole array of artificial constructions with guarantees, debt displacements, etc. that naturally do not offer any solution to the mountain of debt in itself, but have to be seen for what they are: smoke screens.
That 'something' needs to happen, is clear. That we would ultimately all be better off with a financial system that survives, is also crystal clear. However, swinging capital restrictions, one-time levies on savings, to just then continue with the same people as if nothing happened on the same path: that should be out of the question right? Old top exec from De Nederlands Bank, Lex Hoogduin, came up with a creative proposal: a 1 percent norm. The government needs to spend 1 percent less every year, structurally. The proceedings of these structural budget cuts then need to be used to lower taxes. Creative, certainly. Maybe a little bit too simple, but definitely on a better track than our two Harvard economists.
The last word has definitely not been spoken here. The fact that the IMF just a few months after the last debacle comes out again with a political, explosive report, is a clear wake up call for every investor and saver. The financial need among the different governments is high, too high. And the day that politicians will recognize that is coming closer each day, with the necessary consequences to follow for your financial future. And that means most importantly: watch your savings! There will be a levy, we are sure of it. Probably in the form of a 'one-time solidarity tax'. The 'theoretically calculated percentage of 10 percent' by the IMF, is moreover not realistic in our opinion. Furthermore, we believe they will not stop when they have touched your savings: they will most likely take your entire capital into account, of which your savings are just a part.
Damage control is essential. And that is best achieved by spreading your capital. To be continued...
Take cover & Download our Free 'Guide to Gold'
Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.
Follow us on Twitter @SproutMoney