Martin Armstrong on Australia's Bank Deposit Tax

Yesterday I spotted an article by Martin Armstrong (Australia First to Introduce a Compulsory Tax on Money Itself) that I think is misleading (no surprise that Zero Hedge was quick to republish it).

Before delving into Armstrong's claims, let us take a look at what he is presumably talking about (I say presumably because his article rant is light on facts & details about the subject at hand).

From the AFR, a tax on bank deposits:

"The federal government is planning a tax on bank deposits at the May budget in a move that will raise about $500 million a year but which bankers warn could be passed on to customers.

Sources have told AFR Weekend that the government is set to proceed with the bank deposits insurance levy, first proposed by the former Labor government, to shore up revenue and to act as an alternative to forcing banks to hold extra capital as insurance against collapse."

What does that mean in practice?

"The money would be put in a Financial Stability Fund and be used to protect depositors against the highly unlikely event of a bank collapse. In the meantime, the fund would also be used to offset gross debt. If the Coalition adopts the same model as Labor and if banks pass the levy on to customers, it would mean a term deposit currently paying 2.6 per cent would pay 2.55 per cent."

So to correctly frame the situation we need to define what this tax is, is it a tax on money (as per the headline) or a tax on savings as Armstrong suggests in his article?

"The new compulsory control is provided in the 2015 Australian budget, so that everyone who has any savings must pay taxes on their savings. The measure is expected to serve as a global test balloon for Europe and North America, who will watch for the outcome in Australia. If there is no massive resistance of Australian savers, the rest of the world should expect this outright confiscation very rapidly."

In my opinion framing it as a tax on money or savings is implying (wrongly) that bank balances will be reduced in order to fund it. Really it's a tax on deposits and it's levied on the banks, not customer balances. Of course any cost to the bank will likely be passed on in the form of higher fees or lower interest rates, but very unlikely to touch balances (i.e. it's not outright confiscation).

The original Labor proposal was for the levy to apply on deposits under $250,000. Why that amount? Probably because that is the deposit size per customer, per Authorised Deposit-taking Institution (ADI), that the government guarantees. Is it fair that depositors insured by the government (taxpayers really) fund the cost of their own bailout should it be needed? I think so (but welcome opposing views in the comments below).

I wrote about Labor's proposal back in 2013 ($250k+ in an Australian bank? Beware the bail-in.):

"The banks are up in arms over who will foot the bill and there has been a media storm over the tiny fraction of a % that this insurance will cost (for example a bank would need only lower the interest rate paid on a deposit from 3.50% to 3.45% in order to recoup the cost). While the media, banks and politicians get into a scuffle over who will fund the minuscule cost of insuring funds under $250k, there seems to be no investigation or reporting by the media on what might happen to funds over the 'guarantee' limit in the case of a bank failure..."

I'm no fan of 'Too Big To Fail' banking institutions and don't pretend to have all the answers on the best way forward from the position we're in. Ideologically I think banks should be allowed to fail and individuals could organise their own insurance against such events, but would it be responsible of the government to just implement a change like this and pull all guarantees in one swoop?

Armstrong continues:

"Take your money and buy tangible assets, even gold, but you just cannot store it in a bank. Movable assets will be the key and buying equities in the USA may be the only real game in town to protect money."

Now anyone reading this blog for some time (or even if you are looking at it for the first time) should be able to deduct that I'm an advocate for Gold ownership, but that doesn't mean I think you should take out all your savings and buy Gold. Also I think keeping your Gold stored in a safe deposit box with a bank is probably just as safe as any private facility (in Australia) as I concluded in a recent article focusing on this very topic (Storing Gold & Silver: Safe Deposit Box In Australia):

"Bank SDB facilities get characterised as unsafe due to their connection to the banking system, but in my opinion there are some pros and some cons that result from this association and on the whole I don't see bank SDBs as less safe than their private counterparts."

Armstrong concludes on this note:

"The introduction of this tax on money in Australia led by Tony Abbott is the trial balloon for the global economy. The IMF’s Christine Lagarde has led the battle to impose French socialism/communism upon the entire world. I have warned that she is the most dangerous woman on the planet. Do not forget, it was the French elite who sold the idea of communism to Marx – not the other way around. Now the French elite have control of the IMF and they have persuaded all other global financial institutions to also require such a compulsory levy for several years because they see it as the only way to resolve the debt crisis – just confiscate the people’s money."

We've already identified that this isn't really a confiscation of people's money, but rather a levy on the banks to fund a Financial Stability Fund in order to support depositors in event of a bank failure. Is Australia really the first country to implement such a scheme as suggested by Armstrong in the paragraph above and even his article's title (Australia First to Introduce a Compulsory Tax on Money Itself)? No. Perhaps Armstrong should take a look at the history of the FDIC, which could be seen as an equivalent to this fund, guarantee & levy, it looks to me as if the US has had something similar implemented for almost 100 years or more (from: A Brief History of Deposit Insurance in the United States):

Assessments on participating banks. All of the insurance programs derived the bulk of their income from assessments. Both regular and special assessments were based on total deposits. The  assessments levied ranged from an amount equivalent to an average annual rate of about one-eighth of 1 percent in Kansas to about two-thirds of 1 percent in Texas.

Australia's 0.05% levy looks rather small in comparison. And from the FDIC's website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures approximately $9 trillion of deposits in U.S. banks and thrifts - deposits in virtually every bank and thrift in the country."

Australia is hardly the first country to implement such a scheme and we won't be the last.

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Storing Gold & Silver: Safe Deposit Box In Australia

Information is Australian specific for those interested in the use of a Safe Deposit Box (SDB) to store precious metals. Not investment advice, draw your own conclusions about the risks and how to best store your physical assets.

Regular readers would know that while I prefer physical ownership of precious metals, I'm no stranger to highlighting the risks associated with doing so. As I wrote recently (If You Don't Hold It, You Don't Own It):

There is no risk free way of owning precious metals (or any asset for that matter) and safe storage is the key factor when dealing with physical.

I've mentioned my preference for Safe Deposit Boxes (SDBs) in an earlier article (7 Ways To Keep Your Gold And Silver Safe):

Get a Safe Deposit Box

This is a personal favourite of mine. If there is anywhere that's likely to be safe for your Gold and Silver it's in a facility that is built for that very purpose. Just remember that not all safe deposit box facilities are created equally. Many large banks will offer safe deposit box services, make sure you shop around for the mix of safety and price that best fits your situation as in my experience both of these factors can vary substantially between providers. While I expect it's far less likely today than in times past, you should consider that keeping precious metals in a safe deposit box does make it an easy target for any government crackdown and confiscation should it occur.

SDBs offer the safety of a secure storage facility, while leaving the physical handling of precious metals or other valuables to the individual. This avails the owner with a level of privacy and independence that allocated or unallocated accounts don't, even if stored in a similarly secure premises (see my article 'How Safe Are Unallocated Bullion Accounts?' for more information about the risks that this type of precious metal ownership entails).

You can't choose to store your bullion in a SDB facility and expect that all service providers will offer the same level of protection. Several years ago I wrote about a Kennards facility which was broken into with SDBs emptied after the criminals (who were eventually caught and jailed) scoped the warehouse by hiring their own SDB with a stolen credit card. While the Kennards facility provided privacy (no 100 point ID check) and accessibility (24/7 access), it was these same features which put a hole in their security.

If we look to the more secure SDB services in Australia (those housed in a vault) then we still have a choice to make between independent private vaults and those provided by banks, though not everyone has the luxury of choice between these two varieties if they want to keep their metal stored locally. When an individual is considering a choice of facilities it's important they compare each specifically on it's own merits (not something I can do in detail here), the below is mostly a general comparison and anecdotal observations.

The eastern states have the widest selection of private vaults with well recognised names such as Reserve Vault (RV, Brisbane), Custodian Vaults (CV, Sydney) and Guardian Vaults (GV, Melbourne and Sydney).

All three of these vaulted SDB providers offer insurance options that are underwritten by Lloyds of London (CV and GV offer $10,000 complimentary cover). All three are privately owned and proudly state their independence (of banks and government) and while the vault operators may not be covered by all banking regulations they they are considered a financial service and governed by some of the same rules as the banks (for example the AML/CTF Act).

The private vault facilities are eager to differentiate themselves from the SDBs offered by banks. CV has a handy little table outlining the differences between their service and those of the banks.

Let's tackle these line by line. Some of my points will reflect personal experience, not all bank SDB facilities are identical.

Insurance: The complimentary ($10,000) insurance is a nice bonus, but if that's enough to cover your stack then a SDB is an expensive option anyway (e.g. $300/pa for the SDB is a 3% annual storage cost on $10k in metals). Having the vault provider streamline insurance options is convenient, but you can always organise your insurance independently through a broker.

Key Ownership: At the bank SDB facility I use each box is dual key, one held by the customer and they retain the second for opening in tandem. They do also keep a copy of my key, in a locked box with my signature over a seal. In my opinion the fact that you receive both copies of the key from CV is a false sense of security. As their terms and conditions state, if the Government has legal authority to access your box CV will provide it (with or without your permission and key) and if you terminate the agreement (not paying storage fees) then they reserve the right to open the box and sell the contents to recoup their loss. The bottom line here is that not having a copy of your key doesn't stop CV from accessing your SDB contents under the terms of your agreement with them.

Accessibility: I can't speak to an unlimited quantity, but at the bank SDB facility I use I was able to add a second operator with no extra charge. I also have unlimited access to the facility, though do know of some banks who limit the number of free visits during the year before additional fees start to be incurred.

Long Term Storage Discounts: This may be a unique attribute, though don't see the discounts listed on the Custodian Vault website, so they may be trivial.

Security: Ok, they've got the banks there. I don't have biometric entry to the vault and would be surprised if any other bank SDP facilities in Australia do either.

Storage Restrictions: This would vary between bank providers, but in my case I was not an existing client of the bank and was still able to open a SDB.

Regulations: It's true the banks are covered by a greater level of regulation ("Banking Law"), I will discuss this in more detail below, but while some may see this as a con, I see the tighter scrutiny and greater accountability for banks as a positive.

While each bank SDB facility will differ and need to be judged on their individual merits compared with CV, I don't think a strong case was made from the table for avoiding bank SDBs.

GV and RV embedded videos on their site outlining risks of the banking system such as excessive leverage, derivatives, monetary system change, bank holidays and bail-in risks. I would posit that 90%+ of the content was not relevant to the safety of your assets stored in a bank SDB. That said let's look at some scenarios where your precious metals might be at risk in a safe deposit box.

Gold Confiscation: In the past when discussing the merits of bank vs private SDBs, some have pointed to Part IV of the Banking Act 1959 (suspended) which can be paraphrased as being unable to "buy, hold or sell gold unless it is a legitimate part of your trade or in the form of jewellery" (via Bron Suchecki at Gold Chat). These restrictions were applicable across the board (until 1976) and while I think it's unlikely they are reinstated in their current form, I'd expect even if they are or new confiscation laws were introduced that any crackdown on SDBs would be across the board with both bank and private facilities affected in the same way. Private SDB facilities will be compliant with any government request to refuse customer access or seize contents as required by law just as their terms and conditions state. Those who think they will avoid confiscation by using a private facility because it's "out of the banking system" are being lulled into a false sense of security. In any event I think Gold confiscation is highly unlikely in Australia and if a trend emerges globally of governments doing so then we should have enough notice to change views on the risk of it occurring and act if necessary.

Internal Theft: While theft by an employee is an unlikely event, it could arguably be made easier if the SDB facility has a copy of both keys to your box. Furthermore I have seen some bank facilities where they retrieve the box for you from the vault (so your only key is to a padlock attached to the metal storage box). It may not be the case that every private facility gives you both keys or that every bank facility keeps a copy, but in my experience the risk of internal theft from an SDB is potentially higher at a bank facility (if ease of doing so is the only consideration).

The Canberra Times, 25th April 1991

External Theft: The risk of this occurring comes down to the security of each facility. I'd expect that some bank facilities exceed the security of some private vaults and vice versa. Reading through Guardian Vaults list of security measures leaves me impressed, but whether this is a significant step up from other facilities I can't be sure. While listing security specifics may help clients feel good about their choice, marketing in this way also puts more information into the hands of those who may want to get around it.

The Canberra Times, 10th October 1984

Insolvency: In the event of insolvency of any facility the contents of your SDB should be owned free and clear. The biggest risk here is if you want access to your SDB contents while the administration processes takes place (the facility may be closed for regular access while that occurs). Here is where a bank facility might be safer than a private facility. We have a greater insight into the solvency of the banks who are open to scrutiny from the public due to their annual reports and other financial transparency. Even if you don't personally understand how to read the financial position of the bank you have your SDB with, it's likely their share price will be an indicator of health and financial news outlets will be quick to report on any trouble. Furthermore it's a fair assumption that a bank insolvency would result in government support. Contrast that to private SDB facilities, we don't know their financial position and you're not likely to have any warning of their insolvency until the day they shut their doors.

Bank Holiday: In the case we see events unfold where there are wide spread bank failures then there's a chance we see bank holidays. Like insolvencies described above this should only result in a temporary lack of access to the contents of your SDB. Some have suggested that bail-ins may extend to SDBs, but I see that as a highly unlikely. I haven't seen any evidence to suggest that SDBs in Cyprus were seized as part of their recent bail-in measures.

Bank SDB facilities get characterised as unsafe due to their connection to the banking system, but in my opinion there are some pros and some cons that result from this association and on the whole I don't see bank SDBs as less safe than their private counterparts. 

The banks are written off by precious metal holders as shady, but if the last 12 months has taught us anything it's that the bullion industry has it's flaws too (ATO and AFP Investigate Australian Gold Industry Fraud). In fact one of the aforementioned private SDB providers (CV) has management ties to the refiner implicated in the GST fraud story from Vedelago.

As it stands there is no private vault SDB facility in Adelaide so my only option for local storage is with a bank, but I feel comfortable doing so and would only consider moving to a newly available private vault if there were measurable benefits in doing so.

Whichever you choose I think both private and bank (vaulted) safe deposit box services are a smart option and in most cases much safer than keeping your precious metals at home.

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BB.

 

$250k+ in an Australian bank? Beware the bail-in.

Last week the AFR reported the Rudd government was looking to introduce a deposit levy (tax):

The Rudd government plans to impose an insurance levy on all bank deposits, risking a major fight with one of the best-resourced industries on the eve of the election campaign. 

Senior banking figures indicated on Thursday night they would oppose the move and depict it as a tax on bank depositors. 

The government plans to impose a 0.05 per cent insurance levy on every deposit of up to $250,000 to protect depositors against collapses. 

The banks said they will pass on the impost, which equates to 5¢ for each $100, to customers through reduced interest payments on deposits.

The banks are up in arms over who will foot the bill and there has been a media storm over the tiny fraction of a % that this insurance will cost (for example a bank would need only lower the interest rate paid on a deposit from 3.50% to 3.45% in order to recoup the cost). While the media, banks and politicians get into a scuffle over who will fund the minuscule cost of insuring funds under $250k, there seems to be no investigation or reporting by the media on what might happen to funds over the 'guarantee' limit in the case of a bank failure...

Eric Sprott said the following in a recently released interview:

“The one event in my mind would be when it becomes apparent to everyone that having a deposit in a bank is a very risky situation. We saw that in Cyprus where the depositors got nailed on the bail-in. We’ve seen all these proposals to have bail-ins as the solution to the problem in the US, in Canada, in Britain, in New Zealand and in Europe. All the paperwork has been laid out.”

While Sprott doesn't explicitly list Australia, keen eyed blogger 'Barnaby Is Right' captured these interesting snippets from papers that are flying about between our banks, regulators and the treasury, suggesting not only are Australian banks prepared to bail-in customer funds to get out of trouble, but will do so without any warning or disclosure to the market before such an event:

In a November 2012 Technical Note on the Financial Sector Program Update for Australia, as part of their Financial Safety Net and Crisis Management Framework, the IMF has advised that there is a problem:

[Past simulation exercises revealed the need for legislative changes to prevent premature disclosure of sensitive information. Australia’s securities disclosure regime requires, for the protection of investors, immediate and continuous disclosure of information that could reasonably be expected to have a material effect on the price or value of an ADI’s securities. There is a high probability that any resolution or crisis response measures will impact the price or value of an authorized deposit-taking institution’s (ADI’s) securities.

Poor coordination of compliance with the disclosure requirements, timing of resolution or crisis response actions, and the overall public communication strategy regarding these actions could pose risks to financial stability (e.g., through depositor runs) or thwart resolution actions (e.g., through the stripping of the ADI’s assets by insiders) or cause market disruptions. Legislative changes that reduce tension between investor protection and financial stability should be pursued.]

“Reduce tension” between investor protection and financial stability?!

By making laws to “prevent premature disclosure of sensitive information”?!?!

In order to prevent bank runs, which would happen if investors were to find out that a Cyprus-style “resolution or crisis response measure” is in the offing for the bank that they have their money in?!?!!!!

It's unlikely that an event requiring a bail-in would take effect in the near future without further warning signs, but the high level of exposure that Australian banks have to residential mortgages (as recently reported by Moody's) should be sounding alarm bells for those who have deposits at risk...

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BB.

 

You're a pension cheat, criminal or tax evader if...

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

I had a chuckle at a post on Zero Hedge this morning which listed some of the reasons you might be considered a conspiracy theorist:

You Know You Are A Conspiracy Theorist If...

• You are capable of critical thinking.
• You distrust mainstream media.
• You think that drones in America might not be for Al Qaeda.
• You think it’s a little strange that WTC building 7 came down at free fall speed on 9/11 yet it was never hit by a plane.
• You think you have the right to protest.
• You think the War on Terror is a scam.
• You think the War on Drugs is a scam.
• You think the anger directed at America from the Middle East could possibly be related to our foreign policy rather than hating how amazingly free we are.
• You don’t own a television, and if you do, all you watch is RT, especially the Keiser Report and Capital Account.
• You think rich, powerful and connected people should be subject to the rule of law and go to jail if they commit crimes. Even if they are bankers and work at JP Morgan or Goldman Sachs.
• You grow your own food.
• You buy raw milk.
• You think allowing a small group of unelected people (The Federal Reserve) to print unlimited amounts of money and distribute it as they please might not be a good idea.

More in the article here...

One of those things you read and laugh because there is truth to it (Government or regular people probably think you are a conspiracy nut for such thoughts or actions) at the same time that it is absurd that such thoughts or actions should be considered conspiratorial.

Then later in the day I was linked to an article where a former Reserve Bank Official is suggesting the removal of $50 & $100 notes from circulation in order to curb pensioners, criminals and tax evaders from hoarding the notes (article is trimmed, click here to read in entirety):

ELDERLY Australians committing welfare fraud on a massive scale are behind the extraordinarily high number of $100 notes in circulation, a former senior Reserve Bank official says.

Yesterday the Herald revealed there are now 10 $100 notes in circulation for each Australian, far more than the more commonly seen $20 notes.

One popular explanation is that they are used for illegal transactions as part of the cash economy, something the former Reserve official, Peter Mair, rejects as a "furphy".

In a letter to the Reserve Bank governor, Glenn Stevens, dated July 4, Mr Mair laid the blame squarely on elderly people wanting to get the pension and hiding their income in cash to ensure they qualified for the means-tested benefit.

"The bank is basically facilitating a tax avoidance scheme by issuing high denomination notes," he told the Herald. "They are not needed for day-to-day transaction purposes, or even as reasonable stores of value."

Mr Mair said the return for an Australian close to getting the pension who held $10,000 in cash, rather than declaring it, was "enormous".

"If putting it under the bed or in a cupboard means you qualify for the pensioner card, you get discounted council rates, discounted car registration, discounted phone rental - in percentage terms the return is enormous," he said.

His letter to the governor proposes phasing out the $100 and $50 denominations.

"Cards and the internet have delivered a body blow to high-denomination bank notes. They are redundant," he said. "There is no longer any point in issuing them except to facilitate tax dodging.

The authorities would announce that from, say, June 2015 every $100 and $50 note could be redeemed but no new notes would be issued. After June 2017 every note could only be redeemed at an annual discount of 10 per cent. It would mean that after two years, each $100 note could only be redeemed for $80, and so on."

The letter acknowledges the proposal would be contentious and says it should not be done "in any way precipitously", but as payments become more electronic it will become inevitable.

"What would remain in circulation are coins and a modestly expanded issue of currency notes in the $10 and $20 denominations. There is every reason to expect that a national currency issue of this character would soon be adequate." SMH

The Australian $100 note was introduced in 1984. If we use the RBA Inflation Calculator (Link) we can measure that $100 in 1984 would buy a basket of goods valued at $270 in 2011 Dollars. By the time we were to phase out the $100 bill in 2017 it would purchase less than a third of the equivalent 1984 basket of goods (with an inflation rate of 3% between now and then).

Granted we use a lot more electronic transactions today than in 1984 (EFTPOS didn't become widely adopted until the early to mid 90s), however it shouldn't be assumed that those preferring to go about their business with cash are doing so unlawfully. Some just prefer the privacy or convenience that comes with using cash.

Another recent concern is the push for surveillance of citizens via having their internet & telecommunication services monitored:

AUSTRALIA'S security and law enforcement agencies are world leaders in telecommunications interception and data access and like most successful industries, they want more. Federal Attorney-General Nicola Roxon is canvassing a further expansion of surveillance powers, most controversially a requirement that telecommunications and internet service providers retain at least two years of data for access by government agencies. The Age

We are heading toward an Orwellian State on the current trajectory.

Based on the way Australia is heading with new legislation requesting ISPs keep 2 years internet history logs and the suggestion that we remove $50 & $100 bills from circulation I thought it would be worth coming up with a localised checklist... hence:

You know you are a pension cheat, criminal or tax evader if...

• You put some cash aside every week and keep it in your house to give out to the grand kids at Christmas time (my Nana did this).
• You are old enough to remember past bank collapses, understand not to take the system for granted and keep your savings in cash to protect yourself in the high risk environment that we face today.
• You prefer $100 notes over $50s as you can hold more $ in your wallet with fewer notes.
• You like keeping any note larger than $20 in your wallet because keeping the number of $20's required to get through your week in your wallet would put your back out every time you sat down.
• You prefer to draw out cash on an irregular basis to use for daily transactions in order to avoid bank transaction fees.
• You find it easier/more convenient to manage a budget when you can quickly check your remaining balance by opening your wallet or purse, rather than having to make a phone call or access the internet.
• You prefer to use cash in order to maintain a reasonable level of privacy when it comes to your personal spending.
• You hold onto some cash in the event of another global financial crisis where some types of accounts may be frozen in order to prevent a bank run.
• You hold some cash outside of the banking system given the increasing frequency of bank network outages which take down ATM and EFTPOS services.
• You use "non-conventional" methods of preserving your purchasing power (such as using cash to purchase and store bullion).
• You prefer to keep what little money you have in cash to avoid an increasing number of electronic fraud transactions which banks can take significant lengths of time to resolve (4-6 weeks).
• You prefer to save in a form of money (Gold/Silver) which has been in use for thousands of years rather than one which has been around for less than half a century.
• You have a joint savings account with your partner and want to buy them a large gift with cash to avoid them finding out about it.
• You ask to withdraw a large amount of cash in order to purchase a vehicle as the current owner doesn't want to take a cheque.
• You refuse to provide a private business with your ID in order to secure a purchase of bullion (who wants a business to have your address where they suspect you might store the purchase).
• You run a small business and need to keep a cash float on hand to operate smoothly.
• You don't do anything illegal, but would prefer to keep your transactional or internet browsing history private anyway, it's none of the Governments business.
• You aren't doing anything illegal online, but you might still be prejudiced against for your activities anyway (e.g. organising anti-Government rally).
• You are pretty sure that there is a greater chance of someone doing something illegal with your information in the department gathering the data than of doing something illegal yourself so would rather keep your data private.
• You would prefer not to have a Government whose representatives have been known to lie, cheat, steal, spend wastefully, look up inappropriate websites & act like clowns in general to have even greater control over your life than they already do.

I could probably come up with a trillion more (remember the good old days when it was enough to exaggerate with the word million?), but there are only so many hours in the day. If you can think of some good ones drop them below in the comments and I will add them to the post.

BB.

 

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