We've seen lots of press recently about a proposed plan to tax savings account depositors in Cyprus. This plan, initially proposed as a tax on depositors based on a sliding scale of between 6-10% of the value of their savings deposits, was floated as a solution to bail out the country’s insolvent banking system.
News of this plan was poorly-received by the market this week – to wit, we saw an early market sell off Monday morning as rumors circulated around the world that other European nations, such as Greece, Spain and Italy, might not be far behind Cyprus.
Nevertheless, as shocking and terrible as the initial proposal may seem for both savers in Cyprus and for market confidence in general, the nice thing about it was its pure honesty. In fact, there was no pussyfooting around about who’d pay in the end to repair the country’s bankrupt banks. Right now, there’s a similar, but seemingly less sinister, scenario playing out right here in America. Unfortunately, the financial repression that U.S. savers and retirees have witnessed is a similar theft–though not as direct.
Over the past several years, the U.S. Federal Reserve Bank printed trillions of dollars in new currency. These new dollars have gone to fund government-sponsored bailouts of a host of companies across many industries with a focus on those deemed “too big to fail” by politicians and regulators. Now, although the 2008-08 global credit crisis seems like a distant memory, we continue to witness month-after-month of money printing through a mechanism termed “quantitative easing” by Ben Bernanke.
In fact, Helicopter Ben is currently spending $85 billion each month in what market commentators have come to call “QE Infinity” given its open-ended nature. These hot new dollars, fresh off the printing press, are buying treasuries and mortgage-backed securities so that their market price is bid up even higher (and therefore interest rates are even lower). The stated goal is to create a sustained increase in employment by keeping interest rates so low that (a) the housing market more fully recovers and (b) the overall economy begins to grow more quickly.
Unfortunately, an obvious side effect from QE Infinity is that the value of the dollars owned by savers will clearly depreciate over time. As such, owners of savings accounts in the U.S. take note – we’re witnessing the same type of savings account theft here as that proposed by the crazy suggestion floated in Cyprus. The good thing about the Cyprus proposal was that it was honest – here, we won’t know the exact amount of the theft but my guess is that it will be greater than 6-10%!