Cyprus is but the latest member of the European Union’s common currency zone that is caught up in a financial web of its own making. Unable to roll over its growing debt, and unwilling to face down those dependent on the state for wage, welfare and retirement payments — payments its economy is utterly incapable of supporting — it has turned to Brussels and the International Monetary Fund for a 10 billion euro ($13 billion) loan that virtually no one thinks it can ever repay.
Early Monday, international creditors agreed to extend that loan in a last minute deal that, among other things, will impose sharp losses on large depositors in the country’s two biggest banks, one of which will be forced to shut down.
Germany, the EU’s strongest economy, is clearly tired of bailing out its poor cousins, the so-called PIGS (Portugal, Italy, Greece and Spain) being the larger and most improvident of the EU’s Southern Tier. German Chancellor Angela Merkel, facing what is thought to be a tough reelection battle this fall, is understandably reluctant to pony up more German taxpayer money to prop up governments that have shown little interest in making the reforms necessary for financial stability, and little gratitude for the aid they’ve already received.
With a complete meltdown of its financial system in the offing, and EU demands that it raise as much as 5.8 billion euros on its own to “qualify” for the 10 billion euro loan, the Cypriot government agreed to extraordinary, some would say unthinkable, measures. Initially, it had proposed to tax all bank deposits, those above 100,000 euros by 9.9 percent and those below by 6.75 percent. This sent outraged depositors into the streets, and a thoroughly frightened parliament quickly substituted a new plan exempting small depositors from the tax. Under the new proposal, large depositors (what President Obama might call “millionaires and billionaires”) could lose as much as 40 percent of the money they have banked. (They can’t draw it out before the plan takes effect, because the banks are temporarily closed and ATM transactions have been sharply curtailed.) It seems doubtful, too, that the new plan will raise nearly enough of what was demanded to qualify for the loan.
Complicating the situation is that many of the large depositors in Cypriot banks are Russians, not a few of whom are presumed to be Russian mafia, who sought to avoid taxes in their home country.
The financial tumult raging in Cyprus, an island shared by Greeks and Turks in the eastern Mediterranean, has caused some to ask whether such could happen here in the United States. Many dismiss such concern as ridiculous. But is it? Could Washington tax bank deposits? Does it have a claim on not just what we earn, but on what we save after paying taxes on our eaarnings? Not only could such happen here, it already has.
Bear with me for a moment. Fiat dollars have no intrinsic value of their own. When a country’s currency goes bust, as it not infrequently has, even in relatively recent times, it literally becomes not worth the paper it is printed on. The only value fiat money has is measured by its purchasing power — what it will buy.
The Federal Reserve later this year will celebrate the 100th anniversary of its creation. The Federal Reserve is a bank, a huge bank, a central bank, an enormously profitable bank. It alone has the power to print “legal tender” — fiat money out of thin air. Through its purchase and sale of Treasury securities, it manages the money supply and sets interest rates. It is, in theory, independent of the federal government, though in practice it seldom operates as if it is. For the last 10 years or so in particular, it has been extraordinarily accommodative of what some see as an utterly irresponsible fiscal (tax and spend) policy pursued by Congress and the White House.
For five years the Federal Reserve has kept interest rates at a near-zero level. It has monetized the more than $6 trillion added to the public debt over this period. Even if you believe (which I do not) that this has caused real year-to-year inflation to rise by no more than the Fed’s stated target of 2 percent, compare this to what you have earned in interest on money in the bank.
To state it plainly, the Fed has diminished the purchasing power of your money by at the very least 10 percent in the last five years, while you have earned on interest a mere pittance over those five years before taxes.
Is there any real difference between a direct tax on bank deposits, as the government in Cypress has agreed to, and the indirect and hidden tax the Fed has imposed when, to accommodate the federal government’s spending binge, it diminishes the purchasing power of the money you have in the bank?
R.L. Schreadley is a former Post and Courier executive editor.