The major economies and governments of the world have been inching towards change by breaching the trust issue in the economy. Without replacing the bad actors or inept managers, both in the private sector and the government sector, the IMF and Eurozone Finance Ministers (read: Germany) have decided to seize part of the bank deposits of the citizens of Cyprus to pay for the bailout of their banking system.
Regardless of the justification, taking the resources of another without their consent is called theft. When governments do this it is called economic policy, but when your neighbor does this it is a felony offense, punishable by a prison sentence.
Economic policies have their consequences. I recall that my Uncle Clare, a dairy farmer in Clinton County, kept his reserves in cash and municipal bonds (because he knew the school board folks) but not in bank deposits. He remembered quite well when President Roosevelt closed the banks during the depression for three weeks, leaving depositors high and dry. Imagine if you could not pay your bills for three weeks because of government action!
Then under President Carter, I personally recall the surge in the prices of real assets such as gold, silver, diamonds and real estate because people did not believe that government could be trusted to stop the incremental devaluing (taking of value) of their savings through double digit inflation. Government can take the resources of its citizens either through direct confiscation or by manipulating the currency so that prices rise faster than incomes rise or interest rates replenish people’s accounts.
Roosevelt forced the exchange of all the gold coins (currency) in 1932 when the official conversion rate was $20.50 per ounce into dollars. When Washington had successfully gotten all the monetary gold, Roosevelt raised the price of gold to $33.00 an ounce, essentially taking a 50% profit away from the people.
Many folks are also aware that inflation works hand in hand with the tax code, pushing people into higher tax brackets while it simultaneously reduces the value of the currency. Other countries have their own horror stories of governments perpetuating their power by impoverishing their own citizens.
The consequence of this European policy is that the citizens will start moving their assets from bank deposits and instead will hoard their reserves in gold, silver and other forms that government will find difficult or impossible to confiscate. This happened under the Carter administration and was essentially undone by Reagan and Volker in the early 1980s.
As we approach a breach of trust between Washington and US citizens, our resources will also find their way to non-productive hoarding, leading to high unemployment and very slow growth of the economy. In the Carter economy we had stagflation, a stagnant economic growth coupled with high inflation and high unemployment.
We have two of these three issues impacting our economy now – high unemployment and slow to no real growth in the economy. Money removed from the banking and investment systems is money that will neither work to grow the economy nor to employ people.
The other problem with a loss of trust is that it is almost impossible to regain. Consider the consequences of marital infidelity or the trust issue involving a child who’s had a drug addiction, or other instances where trust is the central issue in a relationship. Clearly, the idyllic notion of blind trust is gone forever. Rather, we “trust but verify” (to quote an old Russian proverb).
While this experiment with the economy will not end the world as we know it, it will make things much more painful for nearly everyone, and especially those at the bottom of the economic ladder. The poor are least able to deal with the breach of trust in the economy.
We have been in this situation before and we managed to right the ship of state. It remains to be seen who will come to political leadership and how soon the excesses of government can be corrected. For now, the price of gold and silver will probably continue to maintain their lofty prices, in terms of dollars and Euros.
