Why All Governments Will End Up in Cyprus-like Messes

Cyprus made a deal with its European overlords. It will crucify its savers in order to remain on good terms with the money lenders. Deposits of over 100,000 euros will get a 40% haircut.

What does this tell us?

That governments will do whatever they need to do to 1) keep the money flowing, and 2) stay in business.


 ‘The island nation’s rescue sets precedents for the eurozone that may stick in the memory of depositors and bondholders alike as investors debate who will next fall victim to the debt crisis. Under the terms of the agreement struck… in Brussels, senior Cypriot bank bond holders will take losses and uninsured depositors will be largely wiped out.

The message that stakeholders of all stripes can be coerced into helping a cash-strapped nation may make investors more skittish they’ll be targeted if Slovenia, Italy, Spain or even Greece again is next in line to need help. The risk is that bank runs and bond market selloffs become more likely the moment a country applies for a new rescue, said economists and academics from Nicosia to New York.

“We now have a new type of rule and everyone within the eurozone has to sit down and see what that implies for their own finances,” Nobel laureate Christopher Pissarides, an adviser to the Cypriot government, told The Pulse on Bloomberg Television.

What does it mean for your finances, dear reader?

Probably nothing in the short run. The Dow didn’t care about Cyprus. It went up 111 points anyway. Gold dropped back below the US$1,600 mark.

But in the long run, all governments get themselves into Cyprus-like messes. And all governments have one over-riding concern — to remain in power.

Governments are essentially instruments by which the insiders take advantage of the outsiders. Those who control the government (insiders) use its police power for their own purposes. That does not mean that they can get away with anything they want.

Ultimately, they depend on the sheep-like complacency and credulity of the masses in order to maintain their authority. Modern democracies, for example, hold periodic ballots to give the masses the impression that they are in control. And sometimes, voters really do ‘throw the bums out’.

Usually, though, the insiders have the voters under control, buying the support of important groups — with tax breaks, social programmes, contracts, jobs — giving them enough to keep them in line.

But the insiders risk losing everything if they run out of money. Without money, they can’t buy votes. They can’t continue to move resources to themselves. And they can’t afford their phoney programmes and claptrap redistributions systems either.

In short, without access to money everything falls apart. So, a government such as Cyprus will do anything — including stabbing its major industries in the back — in order to keep the cash flowing. Cyprus is a tax haven and a money centre. Clipping bank accounts is ruinous for its business. But if that’s what it takes to stay in business, that’s what the Cypriot insiders will do.

Is Britain different? France? America? No, they are all on the same course…and all are dominated by insiders (even though the insider group can be large and amorphous) who will stop at nothing to remain in power.

Will they try to cut their liabilities by inflating the currency? Yes. Will they impose heavy taxes to protect their credit? Yes. Will they stiff savers…if they need to? Definitely. They are already doing it. Artificially low interest rates are, in effect, an unlegislated tax on savers.

How much is that tax?

Ah…at the present rate, savers get next-to-nothing in return and the US consumer price index (CPI) is about 2%. This makes the effective tax rate — or the negative interest rate — about 2%.

But if you calculate the CPI the way the Bureau of Labor Statistics did when Jimmy Carter was president, the actual rate of consumer price increases is more like 10%. This puts the annual ‘tax’ on savers at closer to 10%.

So, go ahead. Put your money in a bank. Let your interest payments accumulate. Ten years from now, you will have less than half of what you have today. You might as well have left your money in the Bank of Cyprus.

Bill Bonner
for Markets and Money 

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From the Archives…

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BHP The Old Warrior
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Drama in Europe’s Economy: Savers ‘Suffer for Cyprus’
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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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