Tag Archives: Currency

Thomas Sowell: could a Cyprus-style confiscation of private savings happen here?

Thomas Sowell, an economist for the people
Thomas Sowell, an economist for the people

Surprise! It already is happening here. Thomas Sowell explains in the American Spectator.

Excerpt:

One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.But could similar policies be imposed in other countries, including the United States?

Does that mean that Americans’ money is safe in banks? Yes and no.

The U.S. government is very unlikely to just seize money wholesale from people’s bank accounts, as is being done in Cyprus. But does that mean that your life savings are safe?

No. There are more sophisticated ways for governments to take what you have put aside for yourself and use it for whatever the politicians feel like using it for. If they do it slowly but steadily, they can take a big chunk of what you have sacrificed for years to save, before you are even aware, much less alarmed.

That is in fact already happening. When officials of the Federal Reserve System speak in vague and lofty terms about “quantitative easing,” what they are talking about is creating more money out of thin air, as the Federal Reserve is authorized to do — and has been doing in recent years, to the tune of tens of billions of dollars a month.

When the federal government spends far beyond the tax revenues it has, it gets the extra money by selling bonds. The Federal Reserve has become the biggest buyer of these bonds, since it costs them nothing to create more money.

This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?

I noticed that Brian Lilley had an article about whether Cyprus-style confiscations could happen in Canada. The short answer: yes – for amounts above $100,000 Canadian.

Michele Bachmann questions Ben Bernancke

Awesome:

Partial transcript:

BACHMANN: So the Fed wouldn’t need to be buying all these treasuries then. We could find other buyers of our debt. Is that true?

BERNANKE: Yes.

BACHMANN: So then why are we doing it?

BERNANKE: To keep rates a little bit lower, to help support housing, automobiles, and other parts of the economy that need support.

BACHMANN: But if there are other buyers, why the FED?

BERNANKE: To get rates a little bit lower.

BACHMANN: So if my 18-year-old daughter was spending 40 percent more than what my husband and I were giving her, and she didn’t just do it this month but she did it the next month and the next month and the next month — and finally my husband and I said, ‘We’re just not going to bail you out anymore, we’re not going to continue to finance that overspending that you’re doing,’ and she said to me, ‘Mother, we need to align our solution with the problem,’ — in other words, you need to keep giving me that money because it’s really not a problem yet — I would say, I think you have a problem today.

And the reason why I would say that is because the analogy with the federal government, in January of 2007, our debt was 8.67 trillion. That debt today is closer to 16.5 trillion with the intra-government debt, according to your calculation.

Do you think that’s a problem, that in six years, we’ve gone from 8.67 trillion to 16.5 trillion?

BERNANKE: Certainly I think it’s a problem, and I think it’s important we have measures to bring down it down over time.

BACHMANN: But you said we need to align the solution with the problem. It seems to me we have a big problem. and I’ll tell you why. When I was home this last week and talking to a lot of women, they were telling me, ‘I don’t get this — gasoline at Christmastime was $2.99 a gallon, now it’s $4 a gallon.’ They say, ‘I can’t keep up with the price increases at the grocery store. And we just got our health insurance premium and its going to be $300-a-month more than what it was.’

And so all I want to say Mr. Chairman is that what I’m hearing from people is that they are having to deal with the inflationary pressure.

Inflation is nothing but a hidden tax on people who save their money so that they can be independent in their old age. It’s nice to see Michele looking out for savers like me.

Is the Euro aggravating the European debt crisis?

ECM sent me this story from the liberal German newspaper “Der Spiegel”.

Here’s the thesis of the article:

In the past 14 months, politicians in the euro-zone nations have adopted one bailout package after the next, convening for hectic summit meetings, wrangling over lazy compromises and building up risks of gigantic dimensions.

For just as long, they have been avoiding an important conclusion, namely that things cannot continue this way. The old euro no longer exists in its intended form, and the European Monetary Union isn’t working. We need a Plan B.

Instead, those in responsible positions are getting bogged down in crisis management, as they seek to placate the public and sugarcoat the problems. They say that there is only a government debt crisis in a few euro countries but no euro crisis, citing as evidence the fact that the value of the European common currency has remained relatively stable against other currencies like the dollar.

But if it wasn’t for the euro, Greece’s debt crisis would be an isolated problem — one that was tough for the country, but easy for Europe to bear. It is only because Greece is part of the euro zone that Athens’ debts are a problem for all of its partners — and pose a threat to the common currency.

If the rest of Europe abandons Greece, the crisis could spin out of control, spreading from one weak euro-zone country to the next. Investors would have no guarantees that Europe would not withdraw its support from Portugal or Ireland, if push came to shove, and they would sell their government bonds. The prices of these bonds would fall and risk premiums would go up. Then these countries would only be able to drum up fresh capital by paying high interest rates, which would only augment their existing budget problems. It’s possible that they would no longer be able to raise any money at all, in which case they would become insolvent.

Well, the article talks about how economically productive counties like Germany are on the hook for the bailouts to underperforming countries like Greece and Portugal. That will happen unless Greece reverts to the drachma and stops dragging down the Euro. But the strong European countries are not the only source of bailout funds – there’s also the International Monetary Fund. And guess who funds them?

Consider this article by John Bolton in the New York Post.

Excerpt:

Most Americans had barely heard of the International Monetary Fund before the arrest of its managing director, Dominique Strauss-Kahn, for sexually assaulting a hotel housekeeper. Yet the race to replace him offers a chance to rethink everything about what the real American interest is in the IMF — including whether its continued existence is beneficial.

The top contenders for Strauss-Kahn’s job are French Finance Minister Christine Lagarde and Bank of Mexico Governor Agustin Carstens. Europeans have headed the IMF since its founding, as Americans have led the World Bank — prerogatives that Third World countries increasingly resent as vestiges of colonialism. Carstens’ candidacy is the most visible manifestation of this rising discontent.

[…]Europe is eager to keep the top IMF job not simply because of geographical chauvinism but because continued IMF assistance is critical to European Union efforts to bail out the fractured economic and fiscal system in Greece and several other EU countries. Lurking behind the bailout crisis is the EU’s growing panic over the viability of its currency, the euro. Having a sympathetic ear at the IMF’s pinnacle seems absolutely critical to protect Europe’s parochial interests.

What of America’s interests? We should have long ago resisted throwing our scarce resources, through the IMF or otherwise, into the sinkhole of defending the euro. The currency was always conceived to be as much a political statement as an economic policy: Its European proponents believed the euro would enhance Europe’s strength as an alternative and perhaps rival to America.

If the United States and a few other developed countries like Japan decide to break with Europe over this vote, the IMF’s voting system, based on world-wide economic strength, makes defeating Lagarde a real possibility.

Today’s IMF does little or nothing for US national interests, especially when we face enormous domestic economic challenges. Why should Washington not support Carstens, break the EU hold on the IMF and stop IMF support for the euro?

We can barely afford us, and yet we have to bailout these profligate European nations? Give me a break.