It’s like Europe is a crystal ball, foretelling everything that is to come in America. It would be wise not to ignore what is happening in Cyprus, where up to 10% of each individual bank account will be expropriated by the government in order to pay for a bailout. Electronic transfers have been halted by the government, and first thing on Tuesday morning, since Monday is a holiday in Cyprus, the tax will go into effect, and is expected to raise 5.6 billion Euro’s, or $7.5 billion. Based on this move, it will not be a surprise if “people in Greece, Spain and other weak economic Euro Zone countries will start moving Euros to stronger countries such as Germany and the UK” according to a Forbes article.
Just as Europe’s financial woes foreshadowed America’s recession, we need to listen closely to the signals our politicians give, on whether they think this is a good or bad idea to rob the bank accounts of citizens in order to pay off debt. Some believe this is the start of another financial downturn, because of the massive erosion in confidence that deposits are safe. The fact that banks pay for deposit insurance, and that it was ignored to impose this one time tax, means money will leave Cypress, and the EU as account holders assume it is just a matter of time until other EU countries do the same.
Another Forbes article reports on the buzz from the blogosphere, where John Redwood had this to say:
Heavily indebted governments regularly pillage the money of savers. The reason is simple. Savers have spare money and governments don’t. So many governments want to live well beyond the means of their taxpayers. Some rob savers by inflation, eroding the value of their savings. Some do it by special savings taxes. Some do it by controlling interest rates, to ensure the government can borrow cheaply at the expense of the savers return. Some do all three of these things.
Now the EU and Cyprus are simply going to confiscate part of a person’s savings away for being in a particular banks. That looks like a great way to encourage the mass migration of savings from weak banks in the Euro area to stronger banks somewhere else.
America currently robs savers through inflation, and through controlling interest rates. If the American government thinks it can get away with a savings tax, it will do it. This is the type of situation that all the anti-wealthy propaganda has been gearing up for. If enough voters think it is appropriate to rob the savings of Americans to pay for runaway debt, the government will jump at the chance. Right now our government prefers more confusing methods of robbing savers, such as through inflation. The government has money printed, and gets to use this money, but the value in the market has remained the same, therefore reducing the value of each dollar. When more dollars represent the same amount of wealth, this is inflation, and our dollars cannot buy as much as they used to. We have been putting up with the government robbing us in that way since 1913.
But this more obvious move of taxing bank accounts should be a very clear message that governments cannot be trusted. With deposit insurance from the government, people in Cyprus had a guarantee that deposits into an account totaling fewer than €100,000 would be safe. Not only were these deposits not safe, it was the very government that insured them who is now stealing them. If that doesn’t undermine confidence in government, I don’t know what would.
What is most frightening is that as the bills come due for overextended governments everywhere, the leaders are more and more boldly stealing the wealth of the citizens in order to pay back unfunded government liabilities. What is stopping them from nationalizing companies, and raiding the cash reserves of corporations? The precedent is, there is no rule of law, the government can do whatever it wants. What the leaders seem to not realize however, is that the cash reserves will not go as far as they think. Individuals and companies will not continue to produce and save with the ever present threat of government looters. A tax on bank accounts is the ultimate form of killing the goose that lays the golden egg. I hope the government of Cyprus gets what it needed from taxing these bank accounts, because next time, there will be no savings to tax.
Check back tomorrow for Part II. For now, check out how an economy would look, absent of force.