March 18, 2013 2 Comments
News out of Cyprus over the weekend should concern everyone. Cyprus is in need of an EU bank bailout. Not surprisingly the Germans are tired of bailing out fiscally unstable European nations. With Germany refusing to bail Cyprus out the EU came up with another plan: Tax savings. Just three weeks ago the President of Cyprus laughed off such a proposal as ridiculous. Early Saturday morning in a massive document dump the President’s plan to tax savings (10% for savings over $50k, just under 7% for those with less savings) was revealed. Only the press didn’t pay attention. It took individual citizens complaining on Twitter about not being able to use ATM’s for people to figure out what was going on.
American leftists such as Robert Riech are hailing the taxation of wealth as a great thing. In reality what Cyprus is doing is incredibly dangerous. They’re basically setting up bank runs all across the EU. The people in Cyprus learned too late that their savings were going to be taken from them. Don’t for a second think the folks in Greece, Italy, Spain and Portugal aren’t taking notice. If people believe their country might tax their savings, they’ll pull their savings out of the bank. Because of fractional reserve banking, most banks won’t have enough cash on hand to give back to depositors. Thus we could see bank runs that collapse banks in Italy, Spain and several other countries.
This is both good news and bad news for the United States. It’s bad because the Euro zone is one of our biggest trading partners. Bank runs such as what is likely to happen due to the situation in Cyprus will slow economic growth throughout the EU. Bank runs creat chaos and chaos is never good for economic growth. The only bright side to this is that some large depositors might move their money to the United States. Though having said that banks in Germany and Britain are as stable as ours.
This entire situation sets up a dangerous precedent. While we aren’t likely to see our savings taken from us via a bank enforced wealth tax in the US, there is legitimate concern that it could happen here. We’re a nation that has over $16 trillion in debt. It would hardly be surprising if one day the government decided to tax us in this manner to pay off debts to avoid financial collapse. It’s not likely now but it could be in the future. There have been talks from the left about nationalizing our 401k’s, which would serve a similar end. If people become fearful of banking, the entire financial system could be in major trouble.
In the short run the message being sent by Cyprus is that there is no gain in savings. Savings are one of the most important functions of the family and of an economy. It’s bad enough that governments discourage savings by creating artificially low interest rates and taxing middle class capital gains. With governments in the Euro Zone either taxing bank accounts or considering them, the incentive to save decreases. Without savings, families don’t have a hedge against unexpected unemployment or expenses. Thus they look to government, which of course doesn’t have the money to be our hedge anymore. Especially in socialist countries like Cyprus, Greece, Italy etc.
Make no mistake, the US government is engaging in the same mistakes concerning savings. The Fed keeps interest rates artificially low, thus there is incentive to consume today rather than save for tomorrow. Our national debt is such that at some point we will no longer be able to afford the massive government we’ve created. Our states and local governments are in debt as well. Taxpayers are being taxed to death, wealth is the only avenue the left haven’t explored via taxation. With people not saving and expecting personal bailouts from government, we’ll have a problem on our hands when we can no longer afford our national debt. It’s a matter of time. We can’t add $1 trillion a year to the national debt and expect that to be sustainable forever. We’re not Cyprus yet but we aren’t far off.