Well, I'm sure everyone is thinking it, so I might as well say it. This has got to be the worst economic idea anyone has thought of in years. I have read many articles on this, and I haven't heard from one person who thinks this is a good idea. Why is this so bad?
- It destroys the euro as a store of value. The euro has dropped from $1.3076 to 1.2891 (
http://stream.marketwatch.com/story/markets/SS-4-4/SS-4-25675/) pracitcally overnight, losing nearly 2% of its value. It wouldn't surprise me to see the euro fall much further. So now all of Europe, not just Cyprus, has lost big.
- It violates the private property rights of the Cypriot people. In the United States last year, a group of Porgressive (Democratic) representatives proposed a budget with a 0.25% wealth tax (and a $10 million exemption), and the response of the country was shock. Representative Allen West (R-Fla.) began yelling that this was evidence of Communists in the Deomcratic party. Even though such a tax would have only affected perhaps the richest 0.1% of Americans, there was a deep revulsion at this idea. But the Cypriot tax will affect everyone (and is much larger).
- It permanently destroys the Cypriot banks, as well as possibly those elsewhere in Europe. Banks aren't paying interest anymore, so the only reason people would put moeny in a bank is security and convenience. If the government or the banks can do this, it's safer to put your money in a mattress. Gold has risen sharply in the past couple days, but I don't see how gold would be a store of value in a situation like this, as a government could simply confiscate that as well. Let us not forget the general rule that when you tax an activity, you get less of it in society. In this case, that activity is putting money in a bank.
- It actually cripples the Cypriot economy. No one is able to make financial transactions in Cyprus right now because the banks are frozen. The loss to Cyprus as a whole due to this period of economic inactivity (not counting the other effects) is likely to be considerable.
- It is actually reverse Robin Hood, robbing the poor to bailout the rich and the bankers. Bank balances account for only a tiny fraction of the wealth of the wealthy (who may own real estate, stocks, bonds, etc.) but are the primary asset of the working class. We see how much opposition there is to redistribution of wealth, even when the goal is to make everyone more equal. This is redistribution to make everyone LESS equal. And let us not forget that, like any redistribution of wealth, it actually makes the pie smaller, because people will not generate as much income or wealth if it will be confiscated from them.
- It has also been pointed out elsewhere that the people who might be the worst off here are small business owners, who have large amount of money in the bank that is not really "theirs". They can have revenue in thier bank accounts that is needed to pay off expenses. Imagine a business that incurs $1,000,000 worth of expenses to raise $1,010,000 in revenue, resulting in $10,000 in profit. Now the "tax" gets applied to their entire bank balance, and the result is nearly a $100,000 loss. Since most industries have quite low profit margins, this example is not that far off.
- It potentially could cause an intentional incident. It has been pointed out that many of the largest depositors in Cypriot banks are Russian or Ukrainian. How will those countries react to the theft of their citizens' money by this tax? What would stop Russia or Ukraine from making its citizens whole again by simply confiscating an equal amount of European assets in Russia or Ukraine?
Hang on tight. I think the global financial markets are in for a serious shock. It boggles my mind to think that someone in Brussels actually thought this was a good idea. They might be the only person in the world who believes this. I cannot help but notice that the last four letters of "Cypriot" are "riot"...
