Money

A Risk That Can Be Ignored No Longer

Yesterday, I wrote the letter below to a relative in Italy… After I sent it, I realized that it is entirely applicable to the majority of the world’s population given the generally loathsome nature of all of our respective political “leadership” and that my dear readers might do well to also contemplate such possibilities.

My correspondence:

I do not wish to sound extreme or alarmist, but I believe L should be slightly concerned about his financial situation. I am not referring to his spending or savings habits as those are beyond reproach, but instead to the currency that all of L’s financial assets (including his pension) are in.

It is becoming increasingly less inconceivable that the euro will eventually become extinct (as all paper currencies eventually have) or that, more likely, the southern European countries abandon or are forced out of the euro. Should this take place due to political pressures and an Italian public unwilling to accept austerity measures, it will happen quickly – more quickly than anyone that is not already prepared can react to.

Here’s how it will look:

On a Friday afternoon, after the banks and the financial markets have closed for the weekend, the Italian government will announce that it is renouncing the euro and returning to the lira. This announcement will be coupled with a passionate speech proclaiming that this is a necessary move for Italy’s future prosperity and to protect its sovereignty. Great focus will be made on nationalistic themes, Italy’s past glory and the evils of allowing foreign powers (focusing on Germany) to dictate Italy’s economic policies. Expect lines such as, “No longer will we allow wealthy bankers in Germany to decide what is best for Italians. From now on, we will do what is best for Italy and not Germany!”

Once the above announcement and speech have been delivered, a bank holiday lasting several days will be declared and, “regrettably”, Italians will not be able to make any withdrawals from their accounts during this period. Meanwhile, all of the euros that Italians hold in their bank accounts will be converted to lira and Italians holding cash will be compelled to make their way to government centers to convert their euros to lira. Armored trucks will fan out across Italy to deliver lira notes to banks, post offices, supermarkets and other merchants.

Naturally, Italians will be given a one-for-one conversion ratio and so an Italian with 10,000 euros will soon have 10,000 lira. Italians will be assured that these lira notes are just as good (if not better) than euros.

Only they’re not… Italians will soon notice that should they wish to convert their lira back into euros that rather than receiving the one-for-one ratio that they were given, that they must pay 2-3 lira to receive one euro. The story is the same if Italians wish to purchase dollars or yen or even basic commodities such as gold, gasoline or rice.

It is called currency devaluation and history is full of them. Currency devaluations destroy the lives of savers and those on a fixed pension.

Politicians love devaluing currency because they can pay off debts with currency that is worth far less. Have a crushing load of debt? Just print out stacks of money and pay off the debts with the money that is hot off the presses…

Large Italian corporations like it because although it may cause a few annoyances at home, they can now export their products abroad and sell them for far lower prices. But, do not be fooled by the politicians and the large Italian firms. Destroying the value of a currency is catastrophic for most individuals and many Italians will experience a dramatic decrease in their standard of living.

While this event is far from certain to take place, the risk has increased to the point where I believe your father should have a plan of action in place to prevent the Italian politicians from destroying/stealing what he has worked so hard for during his life. Specifically, he has all of his money just sitting in his bank account. Diversifying into equities, real estate, etc. will help protect him from any devaluation.

Love,

Justin

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4 thoughts on “A Risk That Can Be Ignored No Longer

  1. we should learn from our past, as George Santayana said “Those
    who cannot remember the past are condemned to repeat it”

    thanks justin your wonderful letter.

  2. We should learn from our past as George Santayana Said “Those
    who cannot remember the past are condemned to repeat it”.

    Thanks for your wonderful letter.

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