Gold News

Are We Any Different from Cyprus?

How savers get crucified...

CYPRUS made a deal with its European overlords, writes Daily Reckoning founder Bill Bonner.

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 programs, 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 phony programs 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 center. 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? 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.

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New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

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