Back in the bad old days of 2009 it was like Stalingrad every day. Trapped capital was encircled by wealth-destroying news events. Money that could still walk fled to the core of the global financial system.
Liquidity retreated from risk and US dollar assets were the big winner. Commodities, resource stocks, and the Aussie dollar lost.
Are we going to see the same pattern again? The weekend drama in Europe’s economy could prompt another money migration from the periphery to the core – from Southern Europe to Northern Europe and from the euro to the dollar. It depends on how self-aware and how arrogant Europe’s political leaders are.
The answer to that may depend on how strong the sense of entitlement is in Europe’s political class. There are many ways to read this weekend’s events in Europe. But to us, European elites are simply continuing their anti-democratic behaviour from the political sphere into the economic sphere. In one they take away liberties, in the other savings.
The details of the events in Cyprus are as follows. The assets of the country’s banking system are between five and eight times the size of its GDP. It’s alleged that a great deal of the assets in the banking system belong to Russian oligarchs and global tax dodgers. Nonetheless, Cyprus was in need of a bailout.
Instead, it got a hold up. Savers with guaranteed deposits in the banking system were assessed a ‘stability levy’ over the weekend. Depositors with over €100,000 in the bank will be taxed 9.9% of their savings. If you have under €100,00, it’s a 6.75% tax. This ‘up-front’ and ‘one-off’ levy on insured accounts will raise an estimated $5.8 billion of bailout funds from bank depositors. The remainder of the money will come from the International Monetary Fund (IMF) and the European Central Bank (ECB) in the form of loans.
The IMF said it didn’t want to commit to a larger loan because then it would leave Cyprus with an unbearable government-debt-to-GDP ratio for such a small country (since when has that mattered in Europe?!). The result is that creditors to Cyprus will be paid in full at the expense of savers.
Now in the scheme of things, the bailout amounts are small beer. Spain got bailed out for $41 billion, Portugal for $78 billion, Ireland for $85 billion, and Greece for $380 billion. By comparison, the situation in Cyprus is urgent but not terribly important, at least in terms of monetary amounts (and assuming you aren’t one of the people who just had your savings confiscated).
But the precedent established by the ECB’s decision is what’s important here. Guaranteed deposits will simply be confiscated to pay off bond-holders. ECB and EU officials had the bad taste to defend this on grounds of progressive social justice. They have claimed that since it is Cyprus being ‘saved’, all of Cyprus must pay.
‘In order to have burden-sharing, you extend the tax base, to residents and also non-residents,’ intoned ECB official Joerg Assmussen. How about that for an insight into the heart and mind of a central planning wealth stealer? Ordinary savers must be penalised along with Russian oligarchs to share the burden of making creditors whole. And asking people with fewer savings to share the burden isn’t ethically wrong, it’s an extension of the ‘tax base’.
This is the kind of high-handed thinking you get from entitled elites who view ordinary people as suckers to be pushed and shoved around for their own good. And there’s more! ‘As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,’ said Dutch Finance Minister Jeroen Dijsselbloem.
The only way to defend private behaviour that would otherwise be a crime is to say you’re doing it for the common good and call it ‘just’. It’s hard to explain the attitude of the banking and political elites as anything other than a sense of arrogant entitlement. To be that confident and smug in taking what is not yours you must be supremely confident that you’re morally right or politically untouchable.
Practically speaking, you couldn’t think of a better way to start a bank run, if that was what you were trying to do. You tell guaranteed depositors that their money can be taken at any time. How could it not occur to the ECB that this message would cause a bank run rather than preventing one? Any normal person would reach the same conclusion.
The answer is that the political and banking elites in Europe – and Australia, and America – have routinely run rough-shod over political and economic liberty. It’s what most of them do. The Europeans have referenda on a constitution and ‘ever closer union,’ and when ‘the people’ reject it, the planners move the planning behind closed doors and do what they like anyway.
The same process happens everywhere. In the name of social justice or economic justice more liberties are curtailed. With the illusion of wealth that inflation provides, most people don’t notice or don’t care. So what if the government wants to limit free speech and censor the media? So what if there’s a new tax? So what if the budget surplus has become a chronic deficit? No one cares.
Only this time, the entitled class may have gone too far. They’ve systematically attacked personal liberty and individual freedom in Europe for years. They were so successful – and people were so passive – that they figured extending their attack to economic liberty would be just as easy. And in truth, so few people view low interest rates as a form of financial repression that favours the elites, the attack on economic liberty has also been wildly successful from the planner’s perspective.
But the naked theft of savings coupled with rhetoric of ‘burden sharing’ and what is ‘just’ is too much to ignore, even for the person who goes about his life doing his job and leaving the big matters to the big people. The Europeans will have to hastily back down or arrange something else.
You can’t un-think an idea once you’ve thought it, though. Because of what happened in Cyprus over the weekend, the thought will have occurred to many a European saver that the political class views banks savings as public property and the public as bunch of gullible cows, suitable only for fattening and slaughter. A bank run is a stampede by another name.
for Markets and Money
From the Archives…
Learn How to Play the Rules Game to Cancel Your Mortgage
16-03-13 – Nick Hubble
Seven Situations to Watch in the Pacific Currency War
15-03-13 – Dan Denning
Why Copper Doesn’t Like the S&P500
14-03-13 – Greg Canavan
A Crazy Warning Sign for BHP and CBA Shareholders
13-03-13 – Greg Canavan
Hugo Chavez, RIP
12-03-13 – Bill Bonner