Why tiny Cyprus matters to world’s banking system
By TERRY SAVAGE firstname.lastname@example.org or @TerryTalksMoney March 20, 2013 6:36PM
Protesters stand in front of a banner which reads "Cyprus Says No" during a crucial parliamentary vote on a plan to seize a part of depositors' bank savings, in central Nicosia, Tuesday, March 19, 2013. The Cypriot government sought Tuesday to shield small savers from a plan that is intended to raise euro 5.8 billion ($7.5 billion) toward a financial bailout by seizing money from bank accounts. The plan, which is part of a larger bailout package being negotiated with other European countries, has been met with fury in Cyprus and has sent jitters across financial markets. (AP Photo/Petros Giannakouris)
Updated: May 3, 2013 12:15PM
Q. I’ve been reading about Cyprus, and how the government may be taking money out of their bank accounts. My
question is how safe is our money in American banks?
A. You have hit upon the issue that is of global importance. While Cyprus might be only a small cog in the world of global finance, the proposed “solution” to its financial problems has given rise to a concern about the safety of deposits around the world. First, let me assure you that the “smart money” around the world has moved into the U.S. dollar upon this news, because the United States is presumed to be one of the safest places in the world to store wealth.
But tell that to the Russians who used Cyprus as their “offshore” bank haven — to store both global trading profits and, reputedly, the Russian Mafia’s ill-gotten gains. The plan to “tax” deposits at a rate as high as 10 percent did not come from this small nation. It was promulgated by the financial leaders of Europe, who demanded that in order to receive a further bailout from the European Central Bank, Cyprus would first have to come up with its own 5.8 billion euros.
Other countries, notably Greece and Spain, are in this same position. They elected to impose “austerity” — cut government spending and jobs, raise taxes, and cut pensions. But the Cypriots went right to the big money — the money on deposit in their banks — with this confiscatory tax proposal.
The banks were closed, before money could be withdrawn, as the Cypriot government debated the plan. They were caught in a tight spot, under pressure from Europe. Without another loan, the country would go broke — and have to leave the Eurozone. So they voted to adjust the tax, and exempt small depositors, those with less than $26,000 on deposit in banks. And they said they’d give a “break” on the tax to those with under about $130,000 who would pay only a 6.75 percent tax. Those with deposits above that amount would see a tax confiscation of 9.9 percent of the money in their accounts. The plan didn’t pass, but the anxiety has spread around the world.
Now, back to your question: Could it happen here? It’s unlikely that in America you’d see that kind of outright tax. But the real answer to your question is that it’s already happening. Savers are being penalized at the expense of government spending — only not in such a direct form.
It’s certainly a form of “confiscation” for the Fed to push down interest rates on savings so the government can borrow money to finance its deficits at less than one-half of one percent. And the Fed’s continuing unprecedented round of money creation will eventually lead to another tax on savers — inflation! As more money is created, the money you’ve saved will have less buying power. That, in itself, is a tax, or “confiscation” of your money.
So it’s already happening, but in a much more civilized way than the abrupt money grab that is taking place in Cyprus. It’s like the old argument about boiling a lobster, which asks whether you should throw it into a pot of boiling water, or just put it in warm water and gradually turn up the heat. Either way, the lobster is cooked! And that’s The Savage Truth.