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Terry Savage Headshot

The Crisis Isn't Just in Cyprus

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In the past few days more than one person has asked me about the safety of their money in American banks, in the wake of the headlines about the confiscation of deposits in Cyprus.

First, let me assure you that the "smart money" around the world has moved into the U.S. dollar upon this news, because the United States is presumed to be one of the safest places in the world to store wealth.

But if you live in the European community, and have Euro deposits in banks in Greece, Spain, Italy, you must be a little queasy about the precedent set in Cyprus. Depositors in Cyprus are still standing in line, waiting for the banks to open to get their cash. (ATM withdrawals have been limited to 100 euros per day.) You don't see long lines at banks in other countries -- primarily because these days big money is moved with a click of a computer mouse.

Still, you can be sure that European depositors are getting nervous, especially since the Dutch finance minister, a key figure in creating the plan to snare a portion of large depositors' cash to bail out Cyprus, declared that this strategy could serve as a "model" for other eurozone problem countries. Despite backtracking, his words sent a chill through the European banking community.

The plan to "tax" deposits at a rate as high as 10 percent did not come from this small island nation. It was promulgated by the financial leaders of Europe, who demanded that in order to receive a further bailout from the European Central Bank, Cyprus would first have to come up with its own $5.8 billion euros.

Other countries, notably Greece and Spain, are in this same position. They elected to impose "austerity" -- cut government spending and jobs, raise taxes, and cut pensions. But the Cypriots went right to the big money -- the money on deposit in their banks -- with this confiscatory tax proposal!

The banks were closed, before money could be withdrawn, as the Cypriot government debated the plan. They were caught in a tight spot, under pressure from Europe. Without another loan, the country would go broke -- and have to leave the eurozone. After much outrage, the initial tax plan was adjusted.

In the end, instead of taxing all large deposits, one of the two large banks -- Cyprus Popular Bank -- was declared insolvent. Small deposits, under 100,000 euros, were removed to the Bank of Cyprus. But those with over 100,000 euros in deposits might wait years to see even a portion of their remaining funds returned, as they will be given "claims" on the bank's assets! And those with larger deposits in the Bank of Cyprus found they now held shares in the bank, instead of cash.

Those hit hardest by the plan were the Russians who had turned Cyprus into their own "offshore" tax haven -- to store both global trading profits and, reputedly, the Russian Mafia's ill-gotten gains. Surprisingly, they didn't offer to bail out the banks, thus taking control of a country with tremendous strategic military significance because of its location, as well as natural resources (gas drilling in the Eastern Mediterranean).

This was a confiscatory taking of private deposits, engineered by the IMF and eurozone banking authorities, in order to keep Cyprus from falling out of the European Union. But instead of solving the problem, it has created a widespread fear for the safety of deposits in many countries in the EEC.

Could it happen here? It's unlikely that in America you'd see that kind of outright grab on the part of the government, for any reason, (unless you think back to the gold confiscation of the 1930s). And in America, we're very aware of our deposit insurance limitations. Plus, we're known as the "safe haven" for money from around the world, a place of last resort for scared money.

But the real answer to that question is that it's already happening! Savers are being penalized at the expense of government spending -- only not in such direct form.

It's certainly a form of "confiscation" for the Fed to push down interest rates on savings so the government can borrow money to finance its deficits at less than one-half of one percent! And the Fed's continuing unprecedented round of money creation will eventually lead to another tax on savers -- inflation! As more money is created, the money you've saved will have less buying power. That, in itself, is a tax, or "confiscation" of your money.

So it's already happening, but in a much more civilized way than the abrupt money grab that is taking place in Cyprus. It's like the old argument about boiling a lobster, which asks whether you should throw it into a pot of boiling water, or just put it in warm water and gradually turn up the heat. Either way, the lobster is cooked! And that's The Savage Truth.