A Trillion Dollar Robbery

The doom and gloom surrounding Cyprus and questionable comments by EU leadership socked stocks last month. That’s because Cyprus was forced to put a levy on bank deposits in order to receive EU financial support.

And this one-time tax caused a quite a stir in Europe.

Jim O’Neill, chairman of Goldman Sachs Asset Management, called the decision an “astonishing move” with “little thought of contagion to the rest of the euro zone, and indeed perhaps the world.”

Mark J. Grant, a commentator who has been predicting a collapse in Europe for years, went so far as to compare the terms of the bailout to “rape.”

Comments pertaining to Cyprus made by Jeroen Dijsselbloem – the Minister of Finance in the Netherlands – were especially concerning. Dijsselbloem said that Cyprus would serve as a template for future EU rescues, causing investors to fear future bank runs. Though his remarks were misunderstood, they roiled European stocks and bonds.

However, as I discussed last week, I believe his comments were both wise and prudent. Moreover, the situation in Cyprus should not spook investors.

Though the proposed levy was certainly harsh and significant, it’s not as bad as many people believe. In fact, Cyprus may have gotten off easy compared to the U.S. We’ve been silently taxed in two ways for several years – and depositors haven’t so much as noticed, much less rushed to yank money from bank accounts.

The levy in Cyprus on deposits is as unfair and harmful as current monetary policy is in developed economies. Admittedly, the Cyprus situation seems worse because policy makers were more upfront about it. But shouldn’t policymakers be upfront with their decisions?

A one-time tax – at the most basic level – is a hit to spending power because you now have less money to spend than you did before the taxation. So if we view taxes as a loss of spending power, as opposed to a levy or fee, they’re not so different from currency devaluation caused by loose monetary policy. Both reduce spending power.

The Fed has expanded its balance sheet in recent years, which increased the supply of money. The value of money decreases as the money supply increases. This devaluation usually corresponds to high inflation, although that hasn’t happened.

People – including central bankers – are jazzed that U.S. inflation is running low. The consumer price index increased by an annualized rate of 2% in February, and that rate has rarely moved above 3% since 2008.

So the general price level of goods hasn’t increased by a large amount, and central bankers are pointing to this statistic to show that inflation is subdued. In doing so, they are hiding a massive tax that’s been imposed on dollar owners.

However, gold (not the consumer price index) is the granddaddy of all litmus tests for measuring currency value. Gold is often used as a yardstick to measure currencies because it has no real use other than to preserve capital. The dollar has fallen 45% during the past five years in relation to gold. Put another way  … dollar owners were taxed 45% on deposits since 2008.

So when we measure spending power by using gold as a barometer, the “tax” thanks to monetary easing has been far larger than any depositor ever faced in Cyprus. Given that deposits at the 25 largest U.S. banks exceed $5.4 trillion, the current monetary policy (quantitative easing) came at a huge cost. Yet this hidden tax has never been publically discussed.

Moreover, the artificially low interest rates needed for quantitative easing have penalized savors. People save money in banks to keep it safe so they can spend it later. When banks pay little to no interest on deposits, and when the currency falls relative to other items, spending power is lost. This has the same impact as taxation, too.

Depositors expect to earn interest for keeping money at the bank. However, banks have paid little to no interest to depositors during the past five years, especially compared to the 2% to 3% interest rates that were more common before 2008.

The difference between receiving 0% and 2% for deposits amounts to hundreds of billions of dollars per year. The crooked banks have profited from this environment and aren’t sharing the wealth. Money is staying with the banks and is not reaching the economy or consumers. And this system has been going on for five years.

Though the exact amount is incalculable, it’s safe to say that the combination of low interest rates and currency devaluation has cost consumers and savors at least $1 trillion since 2008.

I’m not saying taxes, low interest rates and currency devaluation are acceptable, or that you shouldn’t be outraged by this “theft.” I’m merely saying that this has happened before, so it isn’t a reason for investors to panic as they did last month. Taxes, low interest rates and currency devaluation share more similarities than many believe. Whether it’s a direct levy on deposits or devaluation of currency, the impact on your spending power is the same – it decreases.

I encourage you to be upset, but there isn’t a reason for fear.

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