If you don’t follow the financial news you may have missed this story that came out over the weekend. James Pethokoukis has the story on his blog. The problem goes back to Greece and the EU. Cyprus an island off of the coast of Greece. And the government of Cyprus chose to invest big time in the sovereign debt of Greece in the hope of getting a big return. But junk bonds carry bigger risk than more conservative issues do. Add to this the fact that Greece is the lay-about good for nothing brother-in-law of the EU who is drunk on the couch asking for another can of beer. Cyprus is now in the position of holding a lot of Greek debt that can’t be paid back under the original terms, if at all. So they went to the central bankers of the EU who, it seems, were willing to cut a deal with the Cyprus government provided that they institute a “tax” on the savings of the citizens.
The problem with this scheme is, of course, that the leftists who are in favor of this kind of thing never seem to think through the effects that happen after the tax goes into effect. Because you can already see on networks like CNBC that people are now openly questioning whether it’s a good idea to keep you money in a European bank. I would predict that this will even have an impact on US banks as people move to make sure that they have only what they have to in their bank accounts and move assets into places that are more difficult to seize.
The need for cash is the mother of financial invention, as Cypriot savers and their wealthy Russian friends are finding out. While taxing guaranteed bank deposits is a new and potentially dangerous wrinkle, non-insured deposits have been confiscated in previous financial crises. Other cash-strapped nations, such as Argentina and Hungary, have nationalized private pensions.
American savers needn’t worry that Uncle Sam will order the FDIC to nick you bank deposits to help pay off Chinese lenders. But higher inflation has the same effect, while also helping government pay off its debt. If Cyprus owned the euro printing presses, they would undoubtedly be running them at high speed right about now. (The US, of course, does own its currency’s printing presses.)
