“Can It Happen Here?”

Posted: April 1, 2013 by ShortTimer in Economics, Government

Real Clear Politics asks the question:

The decision of the government in Cyprus to simply take money out of people’s bank accounts there sent shock waves around the world. People far removed from that small island nation had to wonder: “Can this happen here?”

Whether in Cyprus or in other countries, politicians tend to think in short run terms, if only because elections are held in the short run. Therefore, there is always a temptation to do reckless and short-sighted things to get over some current problem, even if that creates far worse problems in the long run.

Seizing money that people put in the bank would be a classic example of such short-sighted policies.  After thousands of American banks failed during the Great Depression of the 1930s, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created, to have the federal government guarantee individual bank accounts when the bank itself failed.

But who guarantees the government?

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.

And here we have the reason why, yes, it happens here, every damned day, to the tune of $85 billion stolen per month.

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?

So what’s the solution?

Realistically, Milton Friedman pointed out on many occasions that there really is no way to combat inflation, as it’s created by government.  You have to control the government to reign in spending.  If you can’t, it’s best to buy things because things hold their value, and if their price is set at pre-inflation prices, you don’t lose as much purchasing power as you pay it off in weaker and weaker fiat currency.

And because quantitative easing really only works until it collapses the nation, the best advice is still this:

  1. sally1137 says:

    Not only inflation. I can see the President-Dictator’s little thought bubble: he thinks he can grab all the bank accounts. That’s where we’re headed.

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