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Why you should not worry about the Cyprus bailout

The actions of the European Union have left us all in disbelief and we condemn those politicians, officials and legislators who would make it legal to appropriate the savings of hard-working people. However, to allay any fears you would have about holding funds with Liquid Markets, I wish to clearly explain why funds held in a Liquid Markets trading accounts are not at risk.

Q. Why the EU or any government CANNOT impose a levy on your account with Liquid Markets now or in the future. When a client deposits margin with a broker such as Liquid Markets, he uses one of our depositary banks to do so or uses his credit card to deposit funds. His account however is not directly with the depositary bank, it is with Liquid Markets. As such he does not have a bank account with Liquid Markets but a trading account. A trading account implies the purchase and sale of financial instruments such as FX, CFD equities, futures etc. Moreover, it implies the utilisation of margin. A levy, tax, or any other form of deduction therefore cannot be applied on your account without your consent because this would imply the possibility of any open positions being liquidated by the deduction, triggering the margin liquidation level. This would mean that the European Union would be responsible for provoking client losses related to financial transactions and that would never be acceptable to any member of the EU. As such, the reality is that no government can appropriate your funds as long as they are used as margin collateral in a trading account and are not directly deposited in a bank and this regardless of which depository bank you use when you send funds to Liquid Markets and whether it is in the Eurozone or not.

In fact this distinction means that going forward, it will be MUCH SAFER for you to have your savings in a trading account with Liquid Markets than in a standard bank account, so if you're afraid of bailout-fuelled Eurozone haircuts the best defence is to open a trading account! If your interested in more perspectives on the bailout click here. Additionally I would like to provide some answers to some questions you may have.

Q. Why such austerity measures are no better than theft. We are appalled over what has happened this weekend. In fact, the way in which it is being planned is reminiscent of one of those movies where a bunch of criminals organise one of those "bank heists" over a 3 day weekend... The reality though is that this may be the start of a new, very worrisome era. The EU has breached one of the main tenets, in fact, probably the most important principle that characterises free western society: The inviolability of private property. This does not bode well for personal and financial freedom going forward. If the EU can just "take" 10% of anyone's savings (property) in exchange for some worthless, bankrupt stock, and use the feeble excuse that "it's for the common good" what's stopping them from taking half of anyone's savings, or appropriating their house and selling it off to raise assets? The implications here are very, very grave going forward and even hard-boiled socialists must surely see that a "pandora's box" has been opened by the political establishment, which gives license to take what's needed from anyone for the collective. Sound like communism? That's because it is. Lenin must be dancing in his coffin!

Q. Why the levy makes Cyprus banks safer for depositors now. Firstly, it is important to point out that the banking sector is a large part of the Cypriot economy. If the Cypriot authorities could have avoided it, they certainly would have. This decision was forced upon the Cypriot government by the European Union, as a way to finance their 10bn EUR financial rescue package to Cyprus. By the way, it has not been decided yet, but regardless, in terms of investor confidence, the damage is done. This levy, once applied, if it is applied at all, will mean that it will be extremely unlikely that a second levy will ever follow in Cyprus. Not because the politicians say so (48 hours ago they were saying there was 0 chance of a levy, so we know how credible they are) but because there will be no need for it. Sadly, this is the first time in modern history that depositors funds are targeted to be appropriated in Western Europe and sets an awful precedent for the rest of the Euro zone. Depositors all over Europe will now be very uneasy and in fact, a fair portion of them will undoubtedly open accounts in Cyprus given that the levy will have already been made here.

Q. The credit crisis is now more than 5 years old. Why has nothing changed in such a long time? We have seen so many crises since 2007! In over 5 years, you would have imagined that things would have improved. Well, they haven't and heres why: Lately, people all around the world have been led to believe that capitalism is the same thing as state or crony capitalism. Capitalism is free market competition and it is non-interventionism by the state. In such an environment, businesses have to compete with one another on a level playing field, constantly improving products and services and lowering prices because free markets and competition oblige them to do so; otherwise they would lose all their customers and go bankrupt. This constant vigilance by each business means that the consumer benefits on every level and always will in such a system.

True capitalism does not exist anymore in Western Europe and the US. Western governments help big business make more profits at the expense of small businesses and at the expense of the consumer, through constant legislation and every tighter regulation artificially keeping the smaller, more flexible businesses out of the competition. In return, big business helps keep the political establishment powerful by financing their campaigns. Capitalism is not about big business controlling everything with their politician buddies, it's about who can design a better product or service, who can make it cheaper, distribute it better and yes, who can grow the fastest and make the most revenues. The unintended consequence of all this competition is that the consumer benefits the most and businesses must keep on creating value and using best practice, otherwise they lose their clients.

The key is to keep governments small, lean and non-interventionist so that they cannot make friends with big business and in so doing, leave a level playing field for the private sector to perform as it should. This is called laissez-faire and has been used as a scapegoat by the political establishment since 2007. This is impossible because laissez-faire did not exist back then either. In over 5 years of credit crisis, western governments have preferred throwing good money after bad debt because there are too many "vested interests". The old fashioned answer to indebtedness was governments giving an initial helping hand and telling their big banker friends that they're on their on their own and need to figure out how they pull themselves out of trouble without getting taxpayers of all sorts of other countries involved. That would mean lay-offs, salary cuts, bonus cuts, cost cuts, longer work hours and more productivity. Had the big banks been faced with old style, sink or swim (like all other companies), in 5 years, they very probably would have either paid back all or most of their debts.

The problem is, there's too much politics going on and not enough production! On the contrary, the establishment, central bankers, treasury officials, politicians all spew out the same lame excuses and scare tactics at "bailout central". Risks of contagion, the collapse of the whole financial system, financial rescues left, right and centre, QE, and even more deficit spending to spur on the economy (the Keynesian answer to all the worlds problems); like if the answer to indebtedness could ever be found in spending even more Of course the Keynesians will say that it's irrelevant because a sovereign nation can just keep on printing more money. Well, of course, the problem with the Eurozone is that it is not a sovereign nation, it is a monetary union composed of countries with vastly different productivities, consequently you can't just QE you're way out of trouble like some other people do. Any business owner knows that had the EU, after an initial rescue to avoid a bank run, said goodbye to their big banker friends and told them to figure it out or go out of business, they would have done just that, cut costs, increased productivity and made it work. Such is the resilience of human nature.

Q. Why a privately held, debt free, profitable online broker, managed by its own shareholders is your best bet to keep your money safe in today's financial world. Big businesses such as big banks have two very large flaws; they are public companies and as such are not run by the bank's shareholders. The second flaw is their sheer size and the fact that you can hide pretty much whatever you want in their balance sheets for a long time. For many years and still today, the depositor, the average Joe on the street has had the impression that "a big bank is a safe bank". Well, after so many accounting scandals, bailouts and such, I sincerely hope the average Joe has learnt that big does not necessarily mean safe! The question is, WHAT IS SAFE in banking? Public companies are quoted on stock markets but 9 times out of 10, the people who actually risked their money creating those businesses in the first place are long gone by the time the company is known as a publicly traded company on an exchange. Those entrepreneurs and managers cash in on their years of building a business and go do something else, or retire. The result is that the board of directors hire some big-shot CEO to run the company. The problem is that the big shot CEO has a huge salary and bonus but only gets a very small percentage of the shareholding, so in essence he will be rewarded if the company is successful, but if it's not, well, it's not that bad, after all he wont lose his money because he did not invest any in the first place. As such, executive management in big banks are naturally inclined to take big risks, their upside is much bigger than their downside.

Privately held businesses however, like Liquid Markets, are run by the actual shareholders who own a very substantial piece of the shareholding. Myself and the other managers of the company all own the company and together constitute more than 80% of the shareholding of the company. If we make a mistake or do not perform, we cannot just take off to manage another company, we will lose our investment, we could lose our house, our wives could divorce us and our children could end up not going to college because if it. The stakes are so much higher. Consequently, we work extra hard to ensure we make the right decisions, we make sure our books are balanced, control our expenses, hate to have debt on the books, take only small, calculated risks and make sure everyone who works for us is creating value. Businesses like ours are mindful of efficiency and ensure that they are providing a product or service which has true value to its customers or risk losing their business. Let me advance an old fashioned principle that still works very well today, but which has been largely forgotten: It is not the size of a bank or broker which creates security; it is more a question of how and by whom it is being managed. A privately-held, debt-free, profitable online broker such as Liquid Markets, managed by its own shareholders, is your very best bet to keep your money safe in today's world of finance.

Tuesday, 19 Mar, 2013 / 2:48

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