Federal Reserve's Exit Strategy and What It Means for the Stock Market

"Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy – an effort to preserve flexibility and manage highly unpredictable market expectations."

What does this mean? Why would the Federal Reserve reveal that they have "mapped a strategy" to stop their bond-buying binge?

First, the "what does it mean" question - nothing. It means nothing. No one expects the Fed to take any action in the immediate future.

The answer to the second question is more revealing; the Federal Reserve knows their policies have come to have a direct effect on the equity markets. This "leaked" bit of information was designed to gauge the reaction of the stock market to the inevitable end of the bond- buying program. The last thing they want is an overshoot to the downside in the market, so they are conducting research into possible actions to take. 

The great unknown is the effects of the ongoing currency war. The devaluation of the Yen makes the Fed's job infinitely more difficult by strengthening the dollar. It has also put immense pressure on the Eurogroup to act also.1

What to do?

I've been giving the warning that the current rise in the stock market is artificial and unsustainable. If you refuse to take my word for it, perhaps you would be interested in Bank of America's recently released strategy;

 1. Slow down of asset purchases

2. Slow down and then stop reinvestments

3. Raise short-term rates

4. Begin sell down of asset portfolios

1. I plan to do an article about the currency wars soon. The vast majority of people could care less about the price of money in Japan, but they should be very, very concerned, as it will have a profound effect on everyone.

Inflation Drifts Below Target - Why This Isn't Good News

The Treasury and Federal Reserve have been reporting that the inflation rate is "running somewhat below" their target rate of 2.0%. n the latest Board meeting, the decision was made to continue the current policy of buying $85 billion a month in bonds, and there is speculation this amount may be raised. 

So, is "inflation below target a good thing? In short, no. First, let me point out that the "inflation rate" they are talking about isn't the same one you think you are familiar with. The Federal Reserve uses the  Personal Consumption Expenditures (PCE) price index. The rest of the country uses various flavors of the Consumer Price Index (CPI). The CPI is near worthless for the evaluation of everyday prices and the PCE is even worse. By the way, the real rate of inflation, using the pre-1980 methodology, is running almost 10%.

There are two factors that make the current situation dangerous. First, the Fed's purchase of massive quantities of bonds is artificially driving money into other investments such as equities. This is the primary reason for the recent rises in the stock market. It's not an economic recovery. It's a bubble. Secondly, the 4.4 trillion dollars the Fed has already "printed" is a significant inflationary pressure. Every month the Fed buys up more bonds raises the water level behind the inflation dam. Right now, the 4.4 trillion, and the tens of trillions held by foreign banks, and the tens of trillions converted to Eurodollars are not accounted for in the inflation equation. When the bond market collapses, these factors will come into play rapidly.

If you are in the stock market (most people are, either directly or indirectly through pension plans, etc) be aware that conventional advisers such as Dave Ramsey are lying to you when they say the stock market is a great long term investment strategy. It isn't. The history proves it. And right now is the most dangerous time to be in the market since 1928. Be ready to move quickly.

The Reality of One World Government - It's Not A Theory

Many people are vaguely aware of the so-called One World Government “conspiracy”. While the idea has always been considered a fringe element, more and more people are suspecting that the idea contains some truth. They are correct.

Throughout history there have been men and groups of men who attempted, and sometimes succeeded, in establishing control over large portions of the earth’s population; Alexander the Great, Genghis Khan, the Romans, the Turks and many more. The desire to rule over one’s fellow man goes to the very essence of mankind

The One World Conspiracy has also been subject to what I call “Absurdity Poison”, a form of the informal Appeal to Ridicule fallacy. Put simply, the OWG idea has been poisoned by absurd extensions. Person A believes there is a movement to create a One World Government, Person B posits that the world is actually being run by a race of super intelligent reptiles. Person C dismisses the entire discussion based on the absurdity of Person B’s position. Person A’s argument, however true, is poisoned by Person B’s absurdity. No rational person wants to be associated with insanity, so they avoid the topic all together. This is a very strong propaganda technique. The best way to hide a truth is tell a greater lie.

There is a concerted, conscious effort to establish a worldwide unified government. But it isn’t being directed by super-intelligent reptiles, or immortal Jewish bankers who have been alive for hundreds of years. As improbable as it seems, the origins of the current quest for one government began with the United States itself.

The United States found itself the most powerful nation after the end of World War Two. Europe was in ruins and the assent of the great Japanese economy had been halted.  People in power in the U.S. at the time, including Cordell Hull, Harry Dexter White and of course Franklin Roosevelt (and later Harry Truman), knew that it was only a matter of time before Europe and the Asian countries regained their economic strength and would challenge America’s newfound power. Russia, although weakened, was also a direct threat to America’s supremacy. These men wanted to seize the opportunity to establish a new paradigm to ensure the U.S. remained in a position of supreme power.

The first step in the consolidation of The U.S.’s power came before the war was even over. In June 1944 the United Nations Monetary and Financial Conference, better known now as “Bretton Woods” was held. This conference created the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) (now the World Bank). In summary, these institutions established the U.S. dollar as the world’s primary currency and allowed the U.S. to enjoy seigniorage and effectively “tax” or more accurately, steal from, the world’s economy. How this works is the subject of another article. The point being made here is this; The U.S took advantage of their brief authoritarian power at the end of WW2 to establish a world system that guaranteed that temporary power would became permanent.

To avoid being seen as just another opportunist country, the U.S. asserted its power through the United Nations, giving the impression that it was a series of world-wide agreements that enshrined The U.S. as the world’s preeminent power.

But they left a gaping hole.

While the U.S was concentrated on firmly taking control of the world’s money supply, in the spirit of “international cooperation” they allowed other countries equal power in the lesser institutions of the U.N.

It was in the “lesser U.N.” that the world’s elite saw their opportunity. In a long series of rulings, agreements and treaties, the sovereignty of all nations has been eroded. In the areas of trade, food, and even firearms, many of the actions of the U.N. are unstoppable by the U.S.

In order to exercise sovereignty over matters such as gun control and food labeling, the U.S. would be required to give up their control of the world’s money supply.

People wonder why the U.S. doesn’t leave the U.N. or ignore their anti-constitutional rulings. The simple reason is the U.S. is beholden to the U.N. because of its economic monopoly. Those in power, including every president since FDR know this. It is one of the reasons they all seem to be cut from the same cloth. They are all constrained by the same paradigm. One could say the U.S. has sold its soul.

In order to keep sovereignty the U.S. would have to give up its dependence on the advantages of seigniorage. The country would have to get its financial affairs in order and keep them that way. But this is unlikely to happen, and soon it will be a moot point. The other countries of the world have already established formidable power through the U.N. and are now working diligently to replace the Dollar. When that happens, the U.S. will be another third world country subject to the whims of the all-powerful elite, enjoying their rule from the halls of the U.N.

Make no mistake. One World government is a reality. There are elitists that believe they should rule over the lesser, common man. We have allowed our government to create the path for them to accomplish that goal.

Hyperinflation Warning - The Eurodollar Menace

The existence of the Euro-dollar market increases the total amount of dollar balances

available to be held by nonbanks throughout the world for any given amount of money (currency plus deposits at Federal Reserve Banks) created by the Federal Reserve System. It does so by permitting a greater pyramiding on this base by the use of deposits at U.S. banks as prudential reserves for Euro-dollar deposits.

- Milton Friedman, Selected Papers, No. 34

Not to be confused with the Euro currency, the monetary unit of the Eurogroup, a Eurodollar is;

"U.S.-dollar denominated deposits at foreign banks or foreign branches of American banks. By locating outside of the United States, eurodollars escape regulation by the Federal Reserve Board."[1]

I present a simplistic scenario to explain the effects and dangers of the Eurodollar:

Suppose a country creates a currency as a medium of exchange. Let’s say they start with 1 million units. If they then create 1 million more units, it is reasonable to assume the value of each unit, both the existing ones and the new ones, are decreased by half. (The reciprocal of the total number of units). This is classic monetary inflation.

Original unit value = 1

Unit value after doubling the number of units = 0.5

Unit value after quadrupling the number of units = 0.25

…etc

Now suppose that the number of units is doubled, but all the new units “disappear”

Original number of units = 1 million

New units created = 1 million

Total number of units = 2 million

1 million units “disappear” – 1 million

Number of units in circulation = Still 1 million

Therefore, each unit value is still = 1, because the newly created units disappear and don’t have an effect on the value of the original units

This is what happens when U.S. dollars are created by the Federal Reserve and get converted to Eurodollars. Because of the U.S. dollar’s status as the world's reserve currency, other nations must convert (buy) U.S. dollars to conduct international trade. Some of these dollars are kept overseas and never return to the U.S. Just like in our example, they disappear.

This is a great deal for the U.S because it means it get goods essentially for free. As a nation, the U.S. can print dollars and trade them for imported goods. Because the dollars don’t come back, they do not cause inflation. It’s a free ride the country has been on since the end of the Second World War. This is the basis of America’s wealth. Not innovation, not the American work ethic; Trickery.

But in the end, the trick is on the U.S. All those Eurodollars didn’t really disappear. They are still out there. When the rest of the world decides to adopt a new reserve currency, a process that is well under way, they will no longer have a need for the 9.7 trillion dollars they now hold. The dollars will come flooding back into the U.S., inflation will quickly degenerate into hyper-inflation and the real losers will be those required to own dollars – the American taxpayer.

Are you prepared?

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[1] http://www.investopedia.com/terms/e/eurodollar.asp

What's Behind the Gold Price Plunge?

Since my time at REFCO (yes, that REFCO) I have maintained that gold is the most manipulated market in the world, behind fiat currencies of course. But what is going on with the dramatic price moves in gold lately?

First we need to examine what initiated the sell-off. It wasn't some world event or major development; the price move started after brokerage houses and Goldman Sachs notified private investors of an impending liquidation of gold by some large hedge funds. Has this happened? Not yet, and it probably won't.

Most of the price pressure has come from uncovered short futures positions. This isn't unusual in itself, considering the technical status and alleged overbought condition of the market. But we need to look at the bigger picture to get a clear understanding...

The Japanese have embarked on a qualitative easing campaign and the Federal Reserve is pressuring the Euro Zone to do the same. The answer to why, of course, is to prevent an uncontrolled crash of the Dollar because of the massive qualitative easing done by the Fed themselves in the past few years. There is an incredible amount of dollars out there that potentially represent a tremendous inflationary pressure. While the Federal Reserve tells their deflationary fairy tale on the one hand[1], on the other they are desperate to control the dollar. Gold presents a clear and present danger to the Fed's plan and so it is entirely likely they instructed Goldman Sachs and others to deflate gold.- Keep in mind, Goldman Sachs and the rest of the investment and fund houses will win no matter what. They are partners in crime with the Federal Reserve.

My advice -  I am not a "gold-bug" by any means. But ANY hard asset is better than dollars. If you have physical gold, hang on to it. Buy some if you have some extra funds, but don't tie up all your investment in it. The effort to prop up the dollar may get very ugly and gold volatility may go insane. If you have derivatives of any kind, and especially gold derivatives, you are gambling with your wealth. You might as well be at the casino.

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[1] In a recent blog post, Gold Does Not Glitter, Paul Krugman tries to make the case that the gold price drop is proof there is no inflation danger.

Hyperinflation Warning - Debt Phase Transition

The Federal Reserve has been “printing money” on a massive scale for the last several years in support of various stimulus programs; a process they now call Quantitive Easing, or QE. Keynesian theory allows that spending, even deficit spending, results in economic growth. And this has actually been the case during various periods in the 20^th century. For example, increased spending during World War II resulted in a post-war economic boom. Keynesian theory supporters can point to several other examples. 
However, according to the Federal Reserve; 

"QE did not dramatically increase bank loans and the growth of broader monetary 
aggregates." 

What makes the current situation different? -  Economic growth is dependent on the utility of debt.

Let us consider the famous Widget Company. Say the Widget Company manufactures 100 widgets a day. They can take out a loan to buy additional or better equipment to increase their output to 500 widgets a day. Obviously then, the ability of the company to borrow money has some utility. If every dollar borrowed enables the company to earn more than a dollar, the Utility of Debt is said to be greater than 1.

Extrapolated to the entire economy, the same general principle applies. Historically every dollar created by the Federal Reserve has resulted in more than one dollar in increased economic activity. But there is a limit. Eventually a point is reached where the new dollar creates less than one dollar in new economic activity. This point was reached somewhere in the 1950’s. 

Debt Phase Transition is the term applied when the creation of a new dollar actually causes a contraction of economic activity. We have recently reached that point. We have reached a point of debt saturation. No amount of money creation (money printing) can cause economic recovery. Furthermore, the increase in money supply only makes the problem worse since each new dollar actually decreases activity. 

The only possible solution is the reduction of debt, and this can happen in only three possible ways – 1.) Repay the debt, 2.) Default the debt, and 3.) Erase the debt through hyperinflation.

It should be obvious that neither of the first two possibilities will ever happen. (If you do not agree, please see upcoming posts for proof.)

This leaves only hyperinflation. The massive amounts of money being put into the system has not caused inflation yet because it isn’t being used. Money Velocity is very low. (See chart below). But this money still exists, along with huge amounts that has been transferred out of the country because of our multi-decade trade imbalance. All of these excess dollars constitute a large reservoir that will flood the economy when the holders of these dollars decide to exchange them for something else – a process that has already begun.

At no time in the history of man and money has there been such a buildup of excess currency. The hyperinflation that must result will be unprecedented and will make previous hyperinflation events seem insignificant.

BRICS Deliver Serious Blow To the U.S. Dollar

The 5th annual BRICS[1] Summit has wrapped up in Durban, South Africa, and an agreement was signed by the member countries to establish an international development bank to bypass the International Monetary Fund. More importantly, the agreement also provides for the establishment of a new currency to replace the dollar in international trade.

Since the so-called Bretton Woods System, established in 1944[2], the U.S. has enjoyed the benefits of being the worlds official reserve currency. This privilege has enabled the U.S. to prosper by creating an artificial demand for the dollar. With their new arrangement the BRICS countries have abandoned this convention.[3] 

BRICS nations comprise 20% of the global Direct Foreign Investment and this figure is set to rise dramatically. Trade among the group is expected to reach $500 billion in the next 7 years. The group also collectively holds 4.4 trillion USD in reserve. Since they, and presumably other third world countries who join them, will no longer have a need to buy dollars, this will remove a major foundation of the dollars strength. 

Why are they doing this? The short answer is; They are losing the currency wars. The U.S., Europe and Japan have lowered interest rates to near zero, putting extreme upside pressure on the BRICS currencies.

What does it mean to you? Again, the short answer; Inflation. And eventually hyper-inflation as all of the reserves are dumped, along with the trillions in market operations by the Federal Reserve in recent years, there will be a literal flood of dollars and no demand for them.

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[1] BRICS is an acronym for Brazil, Russia, India, China and South Africa

[2] http://www.imf.org/external/about/histcoop.htm

[3] The Bretton Woods System was officially abandoned in 1971, but the U.S. dollar continued to be used as the worlds reserve currency. For a concise history see- footnote 2

 

Economics Is NOT Rocket Science - Stages of the Economic Cycle

This blog was created to simplify the alchemy of economics. Economics is not rocket science, . I maintain that it isn't even a science at all. Behind the facade of formulas, theories and schools, the underlying principals are relatively simple. 

The issue is separating economics from business and investing. Both are essentially the study of people. In economics, if people do a, the result is x. If they do b, the result is y, and so on. The problem in business and investing is trying to predict if and when people will do a or b. Of course, this can be impossible, and is the reason business and investing is difficult....and complex. 

In economics there are "laws" or "rules". Economics doesn't follow the Austrian School some of the time and the Chicago School some of the time. This is ludicrous, despite the fact there is a huge industry of producing and employing economists and researchers. The Federal Reserve itself employs over 300 PhD level professionals. 

So in the interest of offering people a clear view into the obfuscated world of economics, I am re-posting an article from a couple of years ago outlining the true stages of the economic cycle. This cycle has been repeated over and over throughout the history of mankind, and despite of, or perhaps because of, our technical progress we are still subject to the same cycle. Because we are now in stage 11, it is important to know the truth.

True Stages of the Economic Cycle 

1. Hard Money. A form of currency is established to facilitate commerce. In order to gain acceptance the currency is backed by something of intrinsic value such as precious metals. This is known as Hard Money.

2. Debasement of the Currency. It is immediately evident that “free” wealth can be created by Debasing the Currency. In its most fundamental form this involves the practice of charging interest (or usury, the meaning has been exactly the same throughout history up until recent times).

3. Enactment of Legal Tender Laws. Without Legal Tender laws, implied values are self correcting and always closely match true value. Legal Tender laws greatly facilitate the debasement of a currency. The Founding Fathers knew this, Thomas Jefferson wrote: 

"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered".
 

The U.S. Constitution, Art. I Sec. 10 Cl. 1, states: 

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;"

The Supreme Court ruled in U.S. Supreme Court - Wheaton 1827; 

“The prohibition in the constitution to make anything but gold or silver coin a tender in payment of debts is express and universal. The framers of the constitution regarded it as an evil to be repelled without modification; they have, therefore, left nothing to be inferred or deduced from construction on this subject.”

4. The Accumulation of Debt is unavoidable with legal tender laws in general, and especially in a Central Banking scheme such as our current Federal Reserve, in which the perpetual increase of debt is an essential component.

5. An Illusion of Economic Prosperity is created by the accumulation of debt. This is no different in principle from a person going on a spending spree with credit cards. They have the illusion of being very prosperous, but in reality they are destined for a reckoning when the debt cannot be paid.

6. Monetization of the Debt. As the accumulation of debt becomes unmanageable, it become necessary to monetize the debt. The debt grows so large it cannot possibly be paid. There are a few ways to “resolve” this. 

• The most obvious way is through taxation, but this is never politically acceptable. 

• Another way is by directly devaluing the currency. This has been done many times in history, but is also not very politically acceptable.
• The third, and easiest (for leaders at least) is hyper-inflation. In simple terms hyper inflation erases debt by transferring wealth from individuals to government.

It is apparent that all three solutions have one thing in common – all transfer wealth from individuals to government, or more accurately, to the central banks.

7. Dilution of Currency Value The process of monetization directly causes a Dilution of Currency Value.

8. Loss of Confidence. In essence Consumer Confidence is a measure of how well the taxpayer is being fooled into thinking all is well. The dilution of his buying power caused by the dilution of currency creates a Loss of Confidence.

9. Inflation. As buying power decreases, the consumer tries to make up the difference by charging more. The merchant charges more for his goods, the laborer demands more for his services. This is classic Inflation.

10. Inflation Stabilizes as government  implements inflation control measures, but does nothing about the underlying problems, causing a:

11. Return of Inflation, quickly followed by:

12. Hyper-Inflation, which effectively erases the debt. If the U.S. experiences the level of hyper-inflation similar to Hungary in 1946/7 (42 QUADRILLION percent per month), the entire national debt could be paid off with less than a penny. This may sound like a good thing to some, but the truth is, wealth is simply transferred from private individuals to the government. This is the stage of Reckoning. It is obvious that there was no real wealth created in phase 2. This is the essence of my argument against the “Economy creates wealth” proponents. Economic trickery does not create wealth. It never has and it never will.

The wealth transfer causes:

13. Depression, which leads to:

14. Reorganization of Government. It is only at this point that a significant number of people understand the inextricable link between wealth and real money. This enlightenment leads to:

15. Return to Hard Money, and the cycle repeats.

These phases are exponential in nature. The time from the debasement of a nations’ currency to the loss of confidence in that currency can be measured in decades or even centuries. The time between the loss of confidence and inflation however, may only be weeks or months. In the later stages of hyper-inflation the loss of a currency’s value and the accompanying price increases can double in days or even hours.[1]

It should also be noted that inflation is not bad for everyone in equal measure. It is actually a good thing for those people of means who are in a position to borrow to purchase property. The reason is the same; the repayment of debts, is made in currency that is worth less than the currency originally borrowed. This is also the reason working people cannot prosper during times of inflation or hyper-inflation. Wages are generally not indexed to inflation and always lag price increases. Even in the case of the relatively few people whose wages are indexed to inflation, the adjustment is always done after the fact. Loses accumulated from the previous adjustment are never recovered.

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[1] In the Weimar Republic in 1923 workers demanded, and were paid three times a day in order to be able spend the money before it lost further value. 

Cyprus Crisis - Lessons for the U.S.

The Euro has essentially been split in two. There is the Cyprus Euro and the Everywhere Else Euro. Currency trapped in Cypriot banks is subject to capitol controls and export restrictions. While there are some aspects unique to Cyprus, there are important lessons to be learned and warnings to be heeded.

The latest estimates of the amount of “haircut” depositors will be subject to now range from 60 to 100%. Money held in-hand is still worth approximately the same as before the crisis unfolded. Money trapped in Cyprus banks is now worth 40 to 0% of what it was before the crisis. It is important to realize there isn’t really paper money in the banks. Deposits are simply accounting entries, because the Euro is a fractional reserve currency. 

- Just like the U.S. dollar.

 U.S. Bank Deposits vs. Currency

This chart plots total U.S. deposits and circulating currency[1]. At current levels, if the U.S. were to go through a similar crisis as Cyprus, non-cash dollars would lose 88%. In plain English, for every $1000 you had in the bank you would receive $120.Of course the U.S. government could take the non-Cyprus route and devalue the dollar instead, in which case you would get back the entire $1000 but it would only be worth $120. You lose either way. 

This is difficult for many people to grasp, but keep in mind, the 9.2 trillion dollars in deposits doesn't really exist! 

In both cases, capital controls would certainly include a restriction on the transfer of precious metals and possibly forced confiscation. Don’t believe for a second that it couldn’t happen because it already has; in 1933[2].

Comment;

This is one of the fundamental problems I have with main-stream economists and financial advisers. They invariable advise keeping assets in non-cash, non-good forms. The value of the dollar only has value because people think it has. It isn’t backed by gold or any other real asset, and it no longer is even backed by the classic ability of the government to tax. The world knows there will never be tax rates in the U.S. high enough to cover spending, and the world also has seen the U.S. government’s adamant refusal to balance the budget. There are also concerted efforts worldwide to destroy the dollar by removing its status as the worlds reserve currency. Most recently Australia agreed with China to trade directly in each others currencies, thereby bypassing the dollar. Russia, Brazil, India, Iran and others have also moved away from trading in dollars.

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[1] Federal Reserve Statistical Release, H.6, March 28, 2013

[2] Executive Order 6102 Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government April 5, 1933

Cyprus Central Bank Deposits

Above is data from the Central Bank of Cyprus's Monetary Financial Statement for March 2013 showing total deposits by country of origin. While deposits from locals actually went up, there was a slight decrease of foreign, non-eurozone deposits. The surprise is the drastic 18% decrease in deposits from other Eurozone countries. It will be interesting to see the data from March when it becomes available, to support or deny the rumors that certain non-eurozone countries are getting preferential treatment under the capital controls in place.

Crisis In Cyprus Update

In a previous post, Crisis In Cyprus, I mentioned that the Euroroup would take action to try to prevent a run on banks in other troubled Euro countries.
This is a statement from the Eurogroup dated 25 March 13;

"Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.
Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used."

The statement is carefully worded to characterize the Cypriot plan as "specific". No mention is made that the newly adopted "Bank Resolution Framework." specifies that all future assistance will be under the exact same conditions as the Cypriot plan. For all practical purposes, it isn't a unique case at all.

Crisis In Cyprus - Part 3

Agreement between the Eurogroup and Cyprus in regards to the bail-out/in has been achieved. The terms were much more sensible than first discussed, and represents a seemingly responsible position for the Eurogroup. Seemingly, because while they have taken a correct position towards Cyprus, fundemental problems with the Euro have (still) not been addressed.

Cyprus, on the other hand, is doomed to disaster. They are encountering the perfect storm of both supply-side and demand-side crises. Their banking industry is decimated and it is estimated will be cut in half, resulting in massive layoffs. They are of course, unable to devalue their currency to stimulate the other majority sector, tourism.

Cyprus, like Greece before it, will slip into severe recession, possible depression. Over the next year or two, it will become more obvious that their best option would have been to exit the Eurogroup, take the severe devaluation, adjust the Cypriot pound, and immediately begin the process of recovery.

But having accepted the Eurogroup's bail-out, and still being saddled with the Euro, there will be a long, long period of austerity. The capital controls put in place were initially supposed to last a week. Now it has been announced they will be in place a month. In reality. the controls will be in place until there is political change. Being a democratic country, the people will grow weary of the austerity, and vote themselves into power a government that promises to reject the EU's demands. Then they will end up in the same place they find themselves today. The only viable choice it to dump the Euro.