File Away for Future Reference…Under ‘C’ for Cyprus (w/Duplicate to ‘I’ for Italy)
Big things happen in some of the most obscure places and the biggie this weekend came out of the tiny Mediterrean island nation of Cyprus. It was followed a day later by a German bank economist's opinion that a similar event would be of benefit in Italy. The two are big precisely for their attack upon private property rights and the possibility of what could - someday - come to a bank near you.
The word came out Saturday morning that the Cypriot government, in order to qualify for an EU bailout, ordered the forced recapitalization of Cypriot banks by unilaterally charging all Cypriot bank depositors a percentage of their savings held in the banks. Any Cypriot with less than 100,000 Euros in the bank had 6.75% of their savings transferred to a bank recapitalization account; those with greater than savings of 100,000 Euros had 9.9% of their funds taken. The fact that it was called a tax with the promise that it was "one-time" only doesn't hide the fact that it was a wholesale confiscation by the sovereign in support of the banking system. As I write this, the Cypriot parliament is holding up the process but the issue doesn't seem to be whether or not it's happening, but instead the extent to which the poorer savers will be shaved versus the wealthier savers. There will be talk of fairness in the hope that the rhetoric obscures the action and dampens the outrage of the common Cypriot. In the Italian case, a German bank economist stated that a "one-time" wealth tax - a confiscation - of a percentage of all Italian savings would do wonders for the level of the Italian national debt, bringing it down to manageable levels and relieving the pressure upon the Italian government.
The fact that each is supposedly a "one-time" occurrence - actual and proposed - is meaningless. The reality is that any European government can conceivably subvert long-held laws of private property in order to support a system that is undeniably broken. Even if the money were used to pay for the bailouts, there is no change to the situation which causes the need for the bailout. Even if spending were brought under control to maintenance levels, the hit to a nation's GDP will keep the debt/GDP ratio high as the denominator shrinks.
There's no guarantee that such an event will occur in this country, but be assured that the European approach is being closely watched by some here. There's demagoguery and fear-mongering now over the sequestration that affects only 2% of federal spending. If our elected leaders won't even issue a budget and are this cowardly now, wait until we're further down the road of insolvency; it's conceivable that the fear of alienating factional supporters would drive our own government to summarily confiscate our savings to "put our house in order". But that omits the simple fact that they're wholly unable to control their spending and it will ultimately not be a one-time occurrence as they have to revisit that particular well again. Assuming that everyone hasn't simply fled the financial system entirely.
As I said, there is no guarantee that such an event will happen here, but it's still instructive to watch the events unfolding in Europe to learn from their mistakes. The biggest lesson of all however, is that generations of economic lessons to children are now turned on their heads as the war on savers moves from subtle actions to overt, threatening ones.
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