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Belmont Club

Monday, Monday

March 17th, 2013 - 6:44 pm

We are in the care of time. “President Anastasiades [of Cyprus] may need extra time to get the deeply unpopular levy on Cyprus bank deposits through parliament and may have to declare Tuesday a public holiday to stave off a possible run on the banks,” writes the Cyprus Property News.

Monday is a public holiday in Cyprus – Green Monday, which marks the start of lent in the Orthodox calendar. Celebrated with picnics and children flying kites, the atmosphere this year will be subdued.

Analysts have described the decision to raid all bank accounts in Cyprus as a threat to the entire economy of the island. Some are predicting a run on the banks as depositors rush to withdraw cash when they re-open after the holiday.

An extra holiday may mean the banks open Wednesday instead of Tuesday. The authorities will try to use this period time to manage the political backlash.  RT says that “Cyprus is currently deciding whether to raise the anti-crisis tax on savings larger than 100,000 euros to 12.5%, while reducing the levy on smaller amounts to 3 per cent, a source told Reuters.”

The decision came as Cypriot officials noted a distinctly sour mood among the island’s inhabitants. “The last minute discussions are allegedly aimed at appeasing ordinary Cypriots who are about to share a major part of the anti-crisis burden imposed on Cyprus by the European Central Bank.” It’s a tough choice. Anger the Russian mafia and they might not like it. Anger the man in the street and he not like it either.

To mollify the restive Cypriots officials have offered to swap bonds for those depositors who keep their money in the banking system. That is either the offer of a century or a litmus test of imbecility depending on your point of view. The situation is still in flux.

A meeting of the Cyprus parliament had been scheduled for Sunday but was postponed for at least a day in order to try and broker a deal between the parties, political sources are saying. The vote on the measure is now expected on Monday.

At the same time authorities have extended for another day Monday’s bank holiday, so the levy is unlikely to come in force on Tuesday morning as was initially planned. The good news for the depositors …

“Those who hold on to their deposits for two years, will get back half of their deposit in bonds,” Nicos Anastasiades said, trying to avert an imminent wave of deposit withdrawals after the holidays.

The president promised that the bonds will be secured by the revenues in the gas field and promised that pension and provident funds will remain untouched by this one-time measure.

Translation: “I’ll gladly pay you Tuesday for a hamburger today.”

Whatever the wisdom of J. Wellington Wimpy, the finger-pointing over the debacle has started already. “According to Reuters, German Finance Minister Wolfgang Schäuble claimed today that it was indeed the Cypriot govenrment’s decision to go for smaller depositors – not Germany’s.” It is part of a larger package of tax increases which attempts to scare up more cash for the bankrupt country.

Apart from forcing losses on depositors, the Eurogroup, led by Dutch finance minister Jeroen Dijsselbloem and under the clear direction of his German counterpart Wolfgang Schaeuble and IMF chief Christine Lagarde, also secured an increase in Cyprus’ corporate tax rate by 2.5 per cent to 12.5 percent, and an increase in the tax on interest on savings by 20-25 per cent.

The euro ministers argued this should boost revenues, limit the size of the loan needed from the eurozone and keep down public debt.

“The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It’s a decision that leads to the historic and permanent rescue of our economy,” Anastasiades said in a written statement.

Good luck to the buck-passers. In the immortal words of Ed Woods: “Inspector Clay is dead, murdered. And someone is responsible.” The question is who.

But the bigger question is whether the grief will be worth it?  Will the special levy succeed in raising money for failing Cypriot governments? To think about this question consider the following diagram, called the Laffer Curve. The idea behind this curve is simple. If governments collect a zero tax rate they get zero dollars in revenue. If they collect everything people earn (a 100% tax rate) then government revenues also go to zero because nobody has any income.

Somewhere in between is a revenue maximizing point where governments can collect the most money. Beyond it government revenue actually declines because although the tax rates are higher, the income base to which it is applied is lowered.

The Laffer Curve

So where is Cyprus on the Laffer Curve?  Daniel Mitchell argues that pushing new taxes too far will only impoverish both a society and a government. He presented his argument in the following diagram to illustrate the notion of maximizing points.

Don’t kill the Geese that Lay the Golden Eggs

Now Cyprus is way past caring about Growth Maximization. It may even be indifferent to Revenue Maximization. What it probably worried about now can be expressed as: “please God let me survive one more day”. Let us call this point Survival Prolongation Point.

Some economists have calculated that the way to increase government revenue is actually to cut taxes, although “liberals claim that the Laffer Curve has been discredited, and that tax cuts don’t pay for themselves. ” But a country at the Survival Prolongation point needs money so badly that it can no longer do anything long-term rational. The whole focus is on making it to the next day. At the last pinch of the vise there’s only one thing left: taxes on capital.

What the government of Cyprus is effectively doing is raising money by taking the average citizen’s capital — not capital gains or increases in capital — but the principal itself. This is a policy otherwise known as eating your seed corn. This may solve their financing problems in the short run, but the long term prospects of such a strategy are not too bright. It only buys them time. And when the seed corn is gone, not only is everyone screwed. Everyone is permanently screwed. It doesn’t solve the problem.

So the government has extended the bank holiday to Wednesday. But then why not to Thursday, Friday or to the next Monday? Each day of delay only heightens the problem because it underscores the complete desperation of the Cypriot banking system. You can only transfer risk. You can’t abolish it.

The Father of Modern Liberal Finance

But for some simply getting to Monday will be triumph enough.


The Three Conjectures at Amazon Kindle for $1.99

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No Way In at Amazon Kindle $8.95, print $9.99

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Top Rated Comments   
I spoke to a Cypriot friend just today and he was upset, demanding the United States do something. “I love Obama,” he sobbed, “and I go to the airport every day looking for Air Force One.” I asked him what the United States could do, and he said

You have money stuffed in closets
Trillions more in safe deposits
You could easy save dear Cyprus from this fuss
Write a check or just a promise
See I’m not a Doubting Thomas
I believe Obama cares for folks like us
Phones are free and so is healthcare
And your banks are all on wealthfare
They could spare a dime or two to help our cause
Have Obama make us voters
And we’ll be Obama doters
And we’ll pull that lever often without pause
See we follow your elections
And we see you make selections
Based upon how much is promised to the proles
Please don’t think that we’ve intruded
We just want to be included
Have Obama put us on your voter rolls

1 year ago
1 year ago Link To Comment
If you visit look at the photos of nightclub or venue fires, there will always be a pile of bodies thick at the entrance. If only people had been rational and exited one or two abreast nobody would have died. But they all rushed out in a panic-stricken crowd and most everybody dies.

People are not rational. Offer them a "free Obama phone" and many will throw logic to the winds. "It's free!". Offer them 'free health care' and they'll beat a path to polling booth to cast their multiple ballots for the great secular savior. "It's free!".

Of course they know, except in the lowest of low information voters, that it can't really be 'free'. But the crowd pushes and they go along.

And so the crowd surges, like pigeons chasing birdseed until they come to one final line. The line in front of their ATM. "What's the haps, bro?"

"There's no money in the bank!"

"Say what?"

"No money in the bank."

And then comes the final act in the lemming-like behavior. The very same crowd dynamics that made them vote for the man of the styrofoam columns leads them to the bank with styrofoam deposits.

"Who did this?"

"It's Bush's fault."

What has been will be again,
what has been done will be done again;
there is nothing new under the sun.

There's a sucker born every minute.
1 year ago
1 year ago Link To Comment
All Comments   (17)
All Comments   (17)
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Not only can it happened here. It has happened here.

In 1933, Saint Roosevelt confiscated gold coins and bullion of American citizens. In return they were given $20.33 of paper money for each ounce of gold.

If they wanted to buy gold after that (which was illegal) they would have to pay $35 for each ounce of gold. Nice markup huh?

Holders of billions of dollars of US bonds that promised 49.19 oz of pure gold per $1000 of face value received paper money instead. Which somebody (foreign banks) could use 35 of to buy an ounce of gold. So the bonds were transmuted from the right to receive 50 $20 gold coins to a possibility of buying 28.6 oz of gold, if you were a foreigner. A 40% haircut.

10% seems downright civilized by way of contrast.

"Surely", you say,"the American people would not put up with such a theft. And certainly, the Supreme Court would find it it unconstitutional". Think again, white man. The people were as meek as little lambs. And Scotus swallowed it and said is there any thing else I can do for you sir?

Of course the Democrat peg boys who teach our children claim that this outrage was a an act of far sighted statesmanship.

No it wasn't. It was theft pure and simple, and that crime is the corrupt foundation of the Peoples Democratic Republic of the United States.

http://www.youtube.com/watch?v=svdrAHn_LGo
1 year ago
1 year ago Link To Comment
The EUSSR should fail. I’m not going to root for the EU to navigate successfully its crises caused by its false conceptions of human nature, economics, and politics.
1 year ago
1 year ago Link To Comment
The information stores are corrupt, especially those as expressed in the financial system. If we stopped the music for a microsecond in order to square off all the assets and liabilities generated by this marvelous global financial engine we are probably going to find ourselves a few tens of trillion dollars off.

"Fixing" the financial crisis has probably consisted in speeding up the shell game so that the pea travels round so fast we don't notice that it cannot possibly be under as many shells as they claim. But eventually somebody misses a beat and it starts to unravel before the illusion can be reimposed.

When it finally breaks down there are going to be more claims than real assets to satisfy them. Everything has been double and triple sold so the system, in order to survive, must never clear. If bankruptcy becomes manifest the powerful power groups will get paid first, as in the auto industry under Obama.

The oldsters, pensioners, small savers, and other law abiding citizens are going to get it the neck. They life savings, pathetic nest eggs, meager funds and other stores of value are going to get scooped up and the teller windows are going to clang down in their faces.

What happens then, I don't know. There's a YouTube video of someone in Cyprus who brought a bulldozer to a bank. One supposes that if the ATMS stop churning out money there will be hell to pay.

1 year ago
1 year ago Link To Comment
Wretchard said:

"When it finally breaks down there are going to be more claims than real assets to satisfy them. Everything has been double and triple sold so the system, in order to survive, must never clear."

People claim that Bernanke is a "genius" because he has kept the rotten system alive since February 2009. I claim that he has done this through fraud and money printing. Others claim that Bernanke had no choice because the system was so broken that it could never clear.

How was Bernanke so sure that the system would never clear and reset? Was his computer models so bullet-proof that he could trust the nation's future on them? No one, with an ounce of common sense would stake his life on an economics computer model. By continuing the fraud, Bernanke has guaranteed that the system will fail eventually. The only remaining question is how long can he keep it running? They knew that Detroit was dead meat in the late 1980s. Detroit is now a rotting corpse but it didn't get that way suddenly. It was a gradual process. Maybe Bernanke is hoping for slow decomposition rather than sudden catastrophic failure.
1 year ago
1 year ago Link To Comment
After Beirut blew up -- decades ago -- in the Wild Wild Middle East -- some of the 'laundrymen' moved their shops to Cyprus.

This is how and why Cyprus has an out sized 'banking' sector. BTW, a number of the 'players' don't have traditional bank charters. There's a lot of funds shuttling around the ummah -- and Cyprus is one of the nodes on that web.

It's the kind of 'banking' made famous in 'Scarface' (1983)

Reading between the lines, the ECB (Berlin) conducted an audit -- way harsh it was -- only legit assets could hit the books. Said audit was initiated after Berlin found out what a bunch of chronic liars 'managed' Athens.

(They can't even collect swimming pool improvement taxes.)

And, we all know how tight Athens is with Cyprus. (Imagine the naughty money sloshing around Cyprus -- now brought to naught.)

The southern European lands are endlessly famous for corrupt taxation. Wealth taxes have always been used to top up the treasury.

Even Anthony and Cleo used a spontaneous wealth tax to fund their 'project.'

All of the above is why the Euro Zone project must breakdown. The only thing keeping it rolling is the crew of liars in Berlin. The credit cards clear only because Berlin keeps extending them tic.
1 year ago
1 year ago Link To Comment
But maybe they didn't have the guts to go overtly up against the money launderers. So they decided to take some money back directly through a grab; and to muddy the waters they threw in the rest of the Cypriot population into the stew. The WSJ said the concerns centered around two banks; and Lagarde wanted to take -- wait for it -- 30%-40% off deposits over 100,000 euro in those 2 banks. Then somebody had the idea to make it a "solidarity levy"; to spread the pain around. So it then was expanded to cover all the banks.

Think about it this way. Suppose a corrupt politician loots Detroit which is now bankrupt. Instead of going after the guys who stole the loot they decide to impose a levy on everybody to pay off the debts. Solidarity.

But they have been too clever by half. The unintended consequences are now huge. I think they might have to walk it back and either scale back the levy to an insignificant sum or retract it entirely.

1 year ago
1 year ago Link To Comment
Aso, wretchard, think about it this way: this is how governments now deal with everything: punish everyone a little bit, instead of the perpetrators a lot. There is no more dramatic illustration of this than at any major airport where we all get to take off our shoes for no damned good reason at all, among other indignities. The same goes for "gun control." So naturally, today's post-modern governments will "punish" everyone, and solve little or nothing. Security Theater and Financial Theater are different manifestations of the same institutional cowardice.
1 year ago
1 year ago Link To Comment
When do you suppose is the last time any of these alleged grownups played the game "Spoons?"
1 year ago
1 year ago Link To Comment
I spoke to a Cypriot friend just today and he was upset, demanding the United States do something. “I love Obama,” he sobbed, “and I go to the airport every day looking for Air Force One.” I asked him what the United States could do, and he said

You have money stuffed in closets
Trillions more in safe deposits
You could easy save dear Cyprus from this fuss
Write a check or just a promise
See I’m not a Doubting Thomas
I believe Obama cares for folks like us
Phones are free and so is healthcare
And your banks are all on wealthfare
They could spare a dime or two to help our cause
Have Obama make us voters
And we’ll be Obama doters
And we’ll pull that lever often without pause
See we follow your elections
And we see you make selections
Based upon how much is promised to the proles
Please don’t think that we’ve intruded
We just want to be included
Have Obama put us on your voter rolls

1 year ago
1 year ago Link To Comment

Cyprus is obviously fracked--and not in an oil-and-gas sort of way. What will be interesting this week will be to observe any directional changes in the world's markets. I wouldn't expect any major fireworks. This is the sort of hint that history gives you that starts people to thinking "well, maybe I won't deposit next month's excess cash flow in Luxembourg. Them EU boys, they's nuts." Not everybody, not right away, but in ones and twos. And the euro begins a slow, steady slide...

Or at least, that's one possible outcome.
1 year ago
1 year ago Link To Comment
Interesting article, Wretchard, as always.

A few points and observations:

1. As for the immediate situation in Cyprus, anyone taking up the governments offer of bonds later for cash now would be foolish indeed, IMHO. The principle that a government can renenge on bonds has been well and truly established, as bond holders in Greece have already learned, as well as Chyrsler bond holders in the USA. Anyone agreeing to trade their cash for Cypriot bonds has NO guarantee the government will not renenge on them between now and two years from now.

2. Since keeping deposits in Cypriot bands will cause people to lose money both on the deposits and get their savings heavily taxed, I would expect most people who can afford to do so to pull their money out as soon as the banks open their doors. Stuffing your money into a piggy bank and putting it under your bed will save you more money than keeping it in a bank. Those are the new rules Cyprus has established for her people.

3. Now we get to the dangerous part, and here is where crowd psychology comes into play: A lot of people in Southern European countries will be thinking it most definitely can happen here as well. Greece, Spain, Ireland, Italy, Portugal, (the so called PIIGS countries) also have economic difficulties. And the thinking may go, if those evil German bankers are willing to do this to Cyprus, they may also do it to us. If people in those countries, even only a relative few at first, start withdrawing their money, you could see more and more people doing so to avoid future taxes, especially if there is not a lot of trust in the governments of those countries.

4. If that does happen, the result is a dire threat to the Euro itself, since the commone currency means no European country using it can isolate itself from the panic. A bank run on this scale would be a Great Depression level event. And the more governments try to squeeze money out of their populations, the greater the temptation will be to move that money out of the offical European banking system and into dollars, swiss francs or good old fashioned gold. I would expect to see a flight from the Euro, starting very soon.
1 year ago
1 year ago Link To Comment
"What!? The magic money printing press is broke!"
1 year ago
1 year ago Link To Comment
It is the Unintended Consequences which get the elites (and the rest of us) most of the time.

Cypriots thought they had deposit insurance on the first 100,000 Euros of bank savings. If the bank went bust, the almighty government promised it would step in and make the depositors whole. Turns out the almighty government does not have enough funds to do that, so deposit insurance turns into deposit bye-bye.

Unintended Consequence #1: How do bank depositors in other indebted countries (i.e., most countries) react, now that the hollowness of almighty government promises have been laid bare?

Unintended Consequence #2: Will rich Russians now see investing in Russia as preferable to taking their chances with untrustworthy European governments? Could the EU unintentionally have put Mother Russia back on the road to world domination?
1 year ago
1 year ago Link To Comment
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