Cyprus and Russia sold out.

[Iron-Hampster]

http://www.bbc.co.uk/news/world-europe-21814325

"We retire and bring our savings to a bank in Cyprus and they can just take our money away without permission and then say we have shares in a bankrupt bank."

Depositors with under 100,000 euros deposited must pay 6.75%
Those with more than 100,000 in their accounts must pay 9.9%
Depositors will be compensated with the equivalent amount in shares in their banks

"Russians that currently keep the economy afloat will leave the country along with their money,"

"Russia agrees to help a troubled EU state, and the EU calls Russian investors money-launderers? This is totally unfair," Moscow-based blogger Igor Kim told the BBC News website.

According to Reuters news agency, almost half of the depositors in Cyprus are believed to be non-resident Russians.

In Berlin, German Finance Minister Wolfgang Schaeuble called the levy part of the "fair" distribution of the bailout's burden.

this is getting stupid. Why do these governments feel so entitled to their power over every aspect of everyone's lives? They claimed authority over the life savings of all these people and robbed them, all in the name of private interests. Meanwhile people now trying to get their money out of the banks before it can happen and they can't, if they could what would be the point?

this was all done with out their consultation.

here's the best part, Russian investors are getting ripped off too, this is theft on an international scale. It will only make the problems in Europe worsen too.

[Warforger]

Well in general banks do in fact own your savings and they can do whatever they want with them. All the government can do is force the bank to have to give back your money if you demand it and pay the amount you're demanding if the bank doesn't have the money. The idea is that the banks will take your savings and loan them out thereby increasing the banks money. So yah that's always been the case.

But wait this is all % right? How exactly does this mean it will ruin everyone's savings? I mean if I have 100$ and I lose 9$ of it, sure I won't be happy but it's not going to ruin my use of that money.

[Feoric]

Not to pull a leanlifter here, but it seems to me in light of this recent development is that the fundamental concept of modern currency with respect to the EU is that you don't own your money. A very loud and clear message is being sent here, and it's that the EU can tax your money as they please and stop you from using it. The fact that in order to save the Euro they have to resort to preventing withdraws and confiscating funds is just further evidence that this is a failed neoliberal experiment made only worse by crippling austerity where lots of regular people get screwed over.

The biggest concern here is a bank run, which is what they seem to be trying to prevent by prohibiting people from withdrawing large amounts of cash from their banks. That just may prevent a bank run, but at a cost: rioting. The basic idea behind this is pretty easy to understand giving all the economic crises we've been through over the past few years: the banking system in Cyprus, as I understand it, depends heavily on the deposits of companies and not much it's citizens. This is basically the opposite of the German banking system, which provides it's services to German individuals instead of companies trying to avoid taxes and regulations. From Cyprus' perspective, they're scared of a bank run where companies with deposits in Cyprus are rapidly pulling out. Under this scenario, the damage to the banking system would be catastrophic, which would require more bailouts with an even steeper price tag (with austerity, of course). The hope here seems to be that a 10% levy on all companies' deposits isn't enough to warrant said companies making a run for it.

I'm all for mitigation of global financial collapse, and bailouts are kind of a catch-22 in this regard because if you don't do the bailout the world crumbles, but if you do the bailout the shitheads responsible for the crisis get "rewarded." Banking is built on trust (which is kind of ironic in a way because not trusting a banker has been cliche for centuries now) but this move has caused massive damage to people's trust to save at a bank.

[Feoric]

At 3/16/13 08:57 PM, Warforger wrote: Well in general banks do in fact own your savings and they can do whatever they want with them. All the government can do is force the bank to have to give back your money if you demand it and pay the amount you're demanding if the bank doesn't have the money.

This is different, actually. The deposits were not covered by insurance from the Cyprus government, because deposit insurance is to protect you from your bank (and thus your savings) going under. It does not protect you against taxes or government interference, which is what this was. The Cyprus government in conjunction with the Troika were the ones who made this decision.

But wait this is all % right? How exactly does this mean it will ruin everyone's savings? I mean if I have 100$ and I lose 9$ of it, sure I won't be happy but it's not going to ruin my use of that money.

I don't think that's the major issue here. It's the fact that the EU took 7% of everyone's bank deposits on zero notice and with zero recourse, which has massive potential consequences. The Eurozone is an absolute fucking mess. This latest move tells me that anyone that has lots of money in any PIIGS bank is gambling with it. This is a very concerning precedent to set and if I were in Cyprus or the Eurozone period I'd be moving cash out of there asap, and I'm over here safe in America. Imagine what the people over there are thinking. That's the problem here.

[leanlifter1]

A decentralized currency is the only way to end the corruption. Bitcoin is a good example of a proper currency.

[Korriken]

The scary part is, for Americans, we may as well be staring into the future as we watch the events in Europe unfold. Unrestrained deficit spending has brought them to such a messy state of affairs and we're headed in the same direction. what do the politicians do? they feverishly work towards this end. Tax and spend all that and more (or not tax and just spend), they run up deficits while giving other countries financial aid (for whatever reason I can't imagine why we're GIVING AWAY money while borrowing it from China), Eventually the USA will be just like the Eurozone, under crippling debt and falling apart.

One by one the Eurozone countries begin to tumble. Before you know it, the entire Eurozone is pulverized by crushing debt and falls apart. Eventually the Euro will be tossed into the trash can of history, a failed experiment brought down by the greed of politicians who for some reason thought that other other nations could support their nation's gluttonous spending habits.

Problem is, when you have a bunch of pigs at the trough and they won't stop eating, you eventually run out of slop to throw them.

[Warforger]

At 3/16/13 11:24 PM, Korriken wrote: The scary part is, for Americans, we may as well be staring into the future as we watch the events in Europe unfold. Unrestrained deficit spending has brought them to such a messy state of affairs and we're headed in the same direction.

How? The US deficit has been shrinking over the past couple of years.

what do the politicians do? they feverishly work towards this end. Tax and spend all that and more (or not tax and just spend), they run up deficits while giving other countries financial aid (for whatever reason I can't imagine why we're GIVING AWAY money while borrowing it from China), Eventually the USA will be just like the Eurozone, under crippling debt and falling apart.

Deficit spending doesn't necessarily mean a bad economic policy. In fact if you simply blindly go balanced budget spending during a recession is makes the recession even worse because more workers are fired and people are spending less money. Now the US is different because the way its debt works is different. The US will probably forever go into debt and keep borrowing and guess what nothing will happen because of the way the US debt works. As long as the US pays the interest on its debt the value of its debt will stay high, if it ever defaults on this then the rest of the world will go into a recession, it's why governments in say Africa run much smaller debts and deficits but still have to default on their payments because their debt is worthless, whereas the US can just keep selling its. But no, China doesn't even make up that much of the US debt, the vast majority is privately owned.

One by one the Eurozone countries begin to tumble. Before you know it, the entire Eurozone is pulverized by crushing debt and falls apart. Eventually the Euro will be tossed into the trash can of history, a failed experiment brought down by the greed of politicians who for some reason thought that other other nations could support their nation's gluttonous spending habits.

Oh it won't. The Eurozone will stay in the indefinite future because the European Union in general is not about economics.

Problem is, when you have a bunch of pigs at the trough and they won't stop eating, you eventually run out of slop to throw them.

Not entirely. Keep in mind the EU has been calling on Greece for Austerity measures for quite some time, and Greece just had a mere incompetent government. Another one is Italy, which wants to keep cutting taxes to stimulate growth running more deficits again!

Although you're assuming that since they're European they're left wing, which is far from the truth.

[HibiscusMallow]

If the government has to get money they should always have to do it through taxation, no exception. Just so that it is visible to voters how much is being taken and so that it affects everyone instead of just people who saved or whatever. People who save have taken less from the economy, every time you spend money you remove resources from the economy, so basically you are punishing them for being altruistic.

[Feoric]

At 3/16/13 11:24 PM, Korriken wrote: The scary part is, for Americans, we may as well be staring into the future as we watch the events in Europe unfold.

Say it with me:

The United States is not Europe.
The United States is not Europe.
The United States is not Europe.

The first order of business here is that Europe is a continent with 50 countries. All of these countries are completely different from each other and they all have a combination of radically different cultures, languages, history and economic performance. When you see a shitty headline that reads "European Debt Crisis" remember one thing: Europe is not a single or monolithic entity. Europe, in this sense, does not have a "debt crisis," rather "some countries within Europe" do, because it's illogical to say that "Europe" can take on debt.

To make things simple, there's generally three categories these 50 countries fall under:

1) Performing Well

These are countries you don't really hear about, because doing well is not nearly as newsworthy as "on the brink of collapse." Performing well in this case means things like low unemployment and real GDP growth. Countries like Germany (~5.5% unemployment) Iceland (~5.7% unemployment) Switzerland (~3.1% unemployment) Luxembourg (~5.1% unemployment) and Norway (~3% unemployment) fall under this category.

2) Could be Performing Well / Generally Not Good

A chunk of European countries fall under this category for varying reasons. This could be due to historical trend lines and/or poor decisions made at some point which hindered economic growth and caused unemployment to rise. The obvious example of this would be the UK, where the Conservative Party did exactly what they promised to do: slashing government spending. Since people refuse to believe austerity is rarely if ever a good thing, they gobbled this up in the hopes that their debt would be "under control." Of course, this was disastrous, and sent them into a second recession. Some examples of a country just generally not doing all that well but not performing terribly (compared to the countries mentioned below) would be Estonia, where they have a ~10.8 unemployment rate but had a 2.4% increase in real GDP growth for FY 2012, or Georgia, which had an impressive 6% increase in real GDP growth but has a ~16.3 rate of unemployment.

3) Actually Really Bad

These are the countries which everyone talks about, commonly called the PIIGS (Portugal, Ireland, Italy, Greece, Spain). Add Cyprus into the mix and you get a weird acronym I can't seem to make work. There's really complicated issues underneath this whole mess, like historically weak economies and unstable governments, but let's try to see what the differences are as far as the US is concerned:

A) The most important one here, in my opinion at least, is interest rates. Have a look at this graph and you'll start to understand what was happening here. This graph shows that for the rest of the Eurozone (and Europe in general) the interest rates were hovering at around ~3%. The causes are, again, really complex, but I believe they're mainly due to the structure of the Eurozone as a whole, especially the monetary policy (i.e; members cannot print Euros). You can get into specifics for each of the PIIGS + Cyprus but I'll try to be brief so I won't go there unless asked. When the shit started to hit the fan, credit ratings started to get downgraded. The market lost confidence in their ability to pay back their loans, and their rates skyrocketed. Greece was around 29% which is absolutely insane for sovereign debt, that's higher than the rates on some credit cards. During our government shutdown fiasco in 2011 our credit got downgraded, and guess what happened? Nothing. Why? Because the market has absolutely no fear whatsoever in our ability to pay back our loans. In fact, our interest rates are nearly 0%, and real interest rates are negative. Because we have a (comparatively) strong federal government with sound economic policy, we have way more leeway with what we're able to do to control things like inflation. We also have the ability to print our own money, a feature members of the Eurozone do not have.

B) Keeping all that in mind, let's get to the issue of austerity. Since the interest rates for taking on new debt were so high they actually couldn't afford it, it became impossible for them to stimulate their own economies via deficit spending. Because of how monetary policy is implemented in the Eurozone, these countries had to drastically cut their deficits so that they could get loans at lower, more affordable rates. You would think that's the smart thing to do, but it rarely if ever is when your economy is performing badly. In the case of Greece, their deficit actually increased because the austerity measures they undertook had damaged their economy so badly that tax revenues actually declined faster than the budget had been cut. Ironically, while these cuts did help to normalize their balance sheets in the short term, the cuts have actually had the long term effect of sending them into even deeper recessions. The United States, thankfully, does not have this problem. For example, we have the option right now to take on a trillion dollar loan at zero percent interest for any infrastructure project you can think of. Think about that for a second. If you owned a small business and were offered a zero percent interest loan for $1,000,000 with no strings attached, you'd be an absolute moron to not take that loan. We can do that this very second if Obama wanted to and Congress agreed to it. Greece, for example, does not have this option.

C) Let's discuss more about the differences in monetary policy to drive the point home once and for all. As I've said before, Eurozone countries do not have control over monetary policy, but we certainly do. Greece, for example, uses the Euro. The European Union is the institution which decides the monetary policy for all countries using the Euro. Thus, all counties on the Euro have very limited control over their banking systems. The most damning thing about being in the Euro, in my opinion, is having the inability to control your money supply. Let's say the United States has a $300 billion debt payment but was somehow unable to make it due to something terrible happening in Congress. This has not happened (yet) but theoretically, due to the 14th amendment, we could just print $300 billion to cover our payment. If, by chance, we're in a situation Greece was in where interest rates are skyrocketing, we could also make those payments by printing money. Again, this is not possible when you're on the Euro.

In closing, we're not Europe. We're not the Eurozone. We're not Greece, we're not Cyprus. Deficit spending is not the problem, it's actually the solution. For us, China is not a problem, our deficit is not an immediate concern, and our debt is not a concern. We are the safest and most stable country on planet earth right now when it comes to money. Please stop comparing us to Europe, it's really wrong.

At 3/17/13 12:36 AM, HibiscusMallow wrote: every time you spend money you remove resources from the economy

You have no idea what you're talking about.

[Camarohusky]

At 3/17/13 12:36 AM, HibiscusMallow wrote: People who save have put less into the economy, every time you spend money you inject resources into the economy

FIXED

[Iron-Hampster]

At 3/17/13 11:35 AM, Camarohusky wrote:

At 3/17/13 12:36 AM, HibiscusMallow wrote: People who save have put less into the economy, every time you spend money you inject resources into the economy

FIXED

an important part of the business cycle is being able to save money. People made those savings so that they could retire comfortably and through out their retirement, they will be spending it. take that money away from them to feed some short term plan does nothing in the long run other than ruin investor's confidence in the area. If the government can take the money I saved in this bank, then maybe I won't use banks at all? If people don't use banks, their money won't be invested into the local economy, creating more problems.

That's why people are worried that Russian investors (a big part of the economy in Cyprus) are going to pull all of their money out of the region.

[Kel-chan]

Cyprus bankruns = DOOM

watch as it cascades into southern europe then the big countries and the Euro evaporates as everybody withdraws and puts their money into the US, Asia and gold

Bank holidays bitchezzz!

[Feoric]

At 3/17/13 01:05 PM, Iron-Hampster wrote: That's why people are worried that Russian investors (a big part of the economy in Cyprus) are going to pull all of their money out of the region.

Right but this is completely different than saying "every time you spend money you remove resources from the economy." Saving does not necessarily mean hoarding, and I would agree that hoarding is definitely bad for the economy. However, these were all specifically savings accounts which people depended on for lots of things, like day to day expenses. The funds would have eventually been spent and injected into the economy.

Morally I think the Troika overstepped their bounds, but they could have made this somewhat less terrible. Here's a really good analysis of the situation:

"Back in 1941, with the memory of the Great Depression still weighing heavy, an American wrote into the Federal Reserve with an idea. "Would it not be feasible," the member of the public asked, "to impose a Federal tax on the deposit of funds in bank checking accounts?"

The reply from the Fed was polite but succinct: while there's no doubt a tax on bank deposits would have "the advantage of administrative simplicity", it is "not in accord with one of the fundamental principles of taxation in a democracy, namely, that taxes should be imposed in accordance with ability to pay"."

The Fed was absolutely right then. The tax on the savings accounts should have progressively curved out alongside the median yearly wage or whatever. The way this was implemented means that people who just barely or might not even have cash to pay their bills next week are paying a 6.75% tax on their savings, which is ridiculous.

[Iron-Hampster]

At 3/17/13 05:02 PM, Feoric wrote: Right but this is completely different than saying "every time you spend money you remove resources from the economy." Saving does not necessarily mean hoarding, and I would agree that hoarding is definitely bad for the economy. However, these were all specifically savings accounts which people depended on for lots of things, like day to day expenses. The funds would have eventually been spent and injected into the economy.

Morally I think the Troika overstepped their bounds, but they could have made this somewhat less terrible. Here's a really good analysis of the situation:

"Back in 1941, with the memory of the Great Depression still weighing heavy, an American wrote into the Federal Reserve with an idea. "Would it not be feasible," the member of the public asked, "to impose a Federal tax on the deposit of funds in bank checking accounts?"

The reply from the Fed was polite but succinct: while there's no doubt a tax on bank deposits would have "the advantage of administrative simplicity", it is "not in accord with one of the fundamental principles of taxation in a democracy, namely, that taxes should be imposed in accordance with ability to pay"."

The Fed was absolutely right then. The tax on the savings accounts should have progressively curved out alongside the median yearly wage or whatever. The way this was implemented means that people who just barely or might not even have cash to pay their bills next week are paying a 6.75% tax on their savings, which is ridiculous.

no, whether they can make the payment or not has nothing to do with it, even if they are hoarding. By doing anything like this they ruin investor confidence by showing everyone that their money is no longer safe in banks. When people say Capitalism is based on people's faith in the system, I thought they were just calling it unstable again, but then this happens and I see how it's right. No faith= no investment= no work.

This action they are carrying out is not just ridiculously immoral and corrupt and CRIMINAL, it is going to end with disaster. Want to find out what happens when everyone pulls all of their money out of their bank accounts at once? You are about to.

At least when the savers were saving and the hoarders were hoarding, the money they were hoarding and saving was being reinvested into the economy by the bank to create wealth and fund the essential services that make life in Cyprus possible as well as the nonessential services that make it worth living and finally delivering the bank the profit it needs to deliver the savers the interest rates they promised. Cyprus is looking at a Great Depression.

[BumFodder]

At 3/17/13 03:13 PM, Kel-chan wrote: Cyprus bankruns = DOOM

watch as it cascades into southern europe then the big countries and the Euro evaporates as everybody withdraws and puts their money into the US, Asia and gold

Bank holidays bitchezzz!

Cyprus isnt that much of a deal, it cant control half of its territory let alone its economy and its absolutely tiny.

[Feoric]

At 3/17/13 10:36 PM, Iron-Hampster wrote: no, whether they can make the payment or not has nothing to do with it, even if they are hoarding.

I'm not disagreeing with anything you're saying here, I'm actually in full agreement. I was refuting something HibiscusMallow said and I think we got mixed up.

[Iron-Hampster]

At 3/17/13 10:44 PM, Feoric wrote:

At 3/17/13 10:36 PM, Iron-Hampster wrote: no, whether they can make the payment or not has nothing to do with it, even if they are hoarding.

I'm not disagreeing with anything you're saying here, I'm actually in full agreement. I was refuting something HibiscusMallow said and I think we got mixed up.

we probably did

[lapis]

At 3/16/13 09:40 PM, Feoric wrote: It's the fact that the EU took 7% of everyone's bank deposits on zero notice and with zero recourse, which has massive potential consequences.

Had the euro (or maybe even the EU) never existed, the Cypriot government would have mitigated their debt problem either through a default or through quantitative easing, the latter of which would have resulted in people holding money in Cypriot banks keeping all of their cash, but having it lose (at least) 7% of its value. Can you explain how this would have been any different? I'm asking because I believe this was pretty much the norm for several Mediterranean countries until they joined the euro.

[Feoric]

At 3/18/13 05:26 PM, lapis wrote: Had the euro (or maybe even the EU) never existed, the Cypriot government would have mitigated their debt problem either through a default or through quantitative easing, the latter of which would have resulted in people holding money in Cypriot banks keeping all of their cash, but having it lose (at least) 7% of its value. Can you explain how this would have been any different? I'm asking because I believe this was pretty much the norm for several Mediterranean countries until they joined the euro.

It's impossible to answer this question under the hypothetical scenario where the Euro was never created, so I'm gonna have to change it to where Cyprus wasn't on the Euro. It's hard to say because we're discussing a hypothetical which may or may not have affected their investment decisions which exposed them to the PIIGS (particularly Greek debt). It's also hard for me to answer because there's lots of things that can be done, but not all of them yield the best results and/or are not politically possible within the current political climate in Cyprus. The best thing they would be able to do is what Iceland did: inflate their way out of their problem.

Iceland had a staggering amount of debt: 998% of their GDP. For comparison, Greece had 128%. What Iceland did to remedy this was the complete opposite of what the austerity hawks wanted to do - they eliminated their debt outright and inflated their way out. Currently, they have a 5.3% unemployment rate, which is lower than the US (7.7%). Compare that to the unemployment rate of the PIIGS: 16.3% (Portugal), 14.6% (Ireland), 11.1% (Italy), 26.8% (Greece), and 26.6% for Spain (Cyprus is currently at 14% even). A big issue everyone loves to talk about is inflation, so you may be wondering what their inflation rate is after printing so much money. 30%? 20%? 15%? Try 4.8%, a far cry from the Zimbabwe runaway hyperinflation scenario. Had Iceland tried to do what Greece is doing with the placating of creditors, you'd be reading headlines about their unemployment rate or worse. Since then, their credit rating has been upgraded and is currently listed as stable. Iceland's economy continues to grow around 2 percent, all because they installed capital controls on the banks, prosecuted fraud, slashed interest rates, and inflated their way out.

Cyprus doesn't really have a debt-to-GDP issue - they're at 72.4% but expect that number to rise quickly from the effects of austerity measures. The banks in Cyprus were heavily exposed to Greek debt due to their massive amount of bonds holdings. We all know what happened there, so as a consequence of that the balance sheets were destroyed when the value of the debt nosedived. They lost billions, so the Cypriot government stepped in. Here's the thing, though: the Cyprus government can't afford taking over the banks, so here we are. Much like what happened to the PIIGS, their interest rates spiked to 7%. Cyprus would be able to remedy this with just a little bit of short term inflation if they were able to print their money, but being on the Euro makes this impossible. Having their citizens' money essentially stolen from them to pay for half of the bailout is just not a smart policy decision to make when you consider the implications, particularly the violation of trust in having a deposit account. Flat out printing the 13 or so billion they need is a relatively puny amount of money, and the inflation should be very easy to control with proper monetary tools like the ones the Federal Reserve uses. Again, not possible when you're on the Euro.

If you want to know the difference between that and inflation, look no further than how countries are doing that underwent austerity. For example, Italy and Spain were running budget surpluses before they enacted austerity measures, and their debt to GDP ratio was lower than the EU average. The Spanish economy was actually doing well before this - they were slowly rising out of their 2010 recession right before they decided to go full blown on austerity. Higher than usual inflation should generally be avoided, but compared to the rapidly rising rate of unemployment due to mass layoffs from austerity measures which currently is destroying consumer confidence further reducing spending and economic growth, it should be embraced.

[Iron-Hampster]

At 3/18/13 05:26 PM, lapis wrote:

Had the euro (or maybe even the EU) never existed, the Cypriot government would have mitigated their debt problem either through a default or through quantitative easing, the latter of which would have resulted in people holding money in Cypriot banks keeping all of their cash, but having it lose (at least) 7% of its value. Can you explain how this would have been any different? I'm asking because I believe this was pretty much the norm for several Mediterranean countries until they joined the euro.

I think they would have had the caution to do it gradually enough so that the interest people gained from their deposits would have helped hide that, preventing a mass panic but still driving bigger businesses to other countries.

or, they would have taken it for granted and then caused another episode of hyper inflation.

[Feoric]

At 3/19/13 12:55 AM, Iron-Hampster wrote: I think they would have had the caution to do it gradually enough so that the interest people gained from their deposits would have helped hide that, preventing a mass panic but still driving bigger businesses to other countries.

The interest on money in a deposit account has nothing to do with currency devaluation.

hyper inflation.

Not happening.

[lapis]

At 3/18/13 08:24 PM, Feoric wrote: Iceland had a staggering amount of debt: 998% of their GDP. For comparison, Greece had 128%. What Iceland did to remedy this was the complete opposite of what the austerity hawks wanted to do - they eliminated their debt outright and inflated their way out.

Well, yeah, Iceland eliminated most of its debt through a default. Inflation doesn't even have too much to do with it. I'm pretty sure that they defaulted because the British and Dutch governments are still trying to claw back the money that they had to pay to their nationals under the deposit guarantee scheme. Cyprus can also default on its debt; it's just that other European powers are trying to prevent that because they might pull Italy and Spain down along with them. And Cyprus is going to make some people really angry if they default; not the least of which is the Russian government, which loaned them like 2.5 bn a few years ago.

Cyprus would be able to remedy this with just a little bit of short term inflation if they were able to print their money, but being on the Euro makes this impossible

Right, that's the only effect of the euro itself; you cannot use quantitative easing to take off some of the pressure. But you can mimic the results of printing money through specific policies. For example, if wages are high and your labour is uncompetitive compared to other countries (big problem in e.g. Spain), then you could just print money and the relative cost of the wages goes down, making labour more competitive. However, you could also just slash wages. Or a problem could be that you owe too much money to a few foreign big parties, then you could print money and decrease the value of your debt. However, you could also agree a coluntary partial default with those parties (a haircut), to which those parties might agree becuase they know it's better than losing everything in a complete default.

Finally, if you need money you could print it and all creditors that hold your currency would relatively lose some money because what they have becomes less valuable. However, you could also diretly levy this money through a tax. What's happening in Cyprus is exactly that, and there isn't anything more being 'stolen' than what would have happened in the situation that you propose (i.e. printing money); at least not from the point of view of the common account holders. That's my point.

[Feoric]

At 3/19/13 07:12 AM, lapis wrote: Well, yeah, Iceland eliminated most of its debt through a default. Inflation doesn't even have too much to do with it. I'm pretty sure that they defaulted because the British and Dutch governments are still trying to claw back the money that they had to pay to their nationals under the deposit guarantee scheme.

They didn't default, they let the banks fail. This meant that instead of a taxpayer funded bailout, the bondholders took the losses. They protected their social programs instead of their creditors. This is why the British and the Dutch are trying to get their money "back," because they were both account depositors in IceSave, which collapsed.

Cyprus can also default on its debt; it's just that other European powers are trying to prevent that because they might pull Italy and Spain down along with them.

Well we're about to find out. The Cypriot government apparently can't come to an agreement and this tax levy is a source of outrage, understandably. They keep extending the bank holiday until they can reach a deal. Thursday is the earliest they will open to prevent people from taking out their money in the meantime. As I was typing this I read that the Cypriot government voted no on the tax levy deal so who knows if they'll be able to pass a modified version, we can only speculate at this point what the next course of action will be. The options I see as of right now is a) a passable modified tax levy is negotiated, b) Cyprus sells it's natural gas supply to the Russians and they take over their banks or c) they default and leave the Eurozone. Cyprus is fucked either way. Merkel has made it very clear that there will be no more bailouts, and the German elections are in 6 months, so I expect her to take a hard line on this. With no deal and no bailout, the Cypriot banks are going to collapse. Cyprus doesn't have the funds to cover its own deposit insurance.

And Cyprus is going to make some people really angry if they default; not the least of which is the Russian government, which loaned them like 2.5 bn a few years ago.

Here's an interesting factoid about that loan: since Cyprus is on the hook for the Greek deposits from the bonds which took haircuts, they got that cheap (4.5%) loan you mentioned from the Russians. Prior to this, Cyprus was running a balanced budget. However, while they were in the process of getting their shit together, the ratings companies downgraded them. This is the part that really gets me: when credit ratings get downgraded, insurance premiums rise. This, in essence, created the very crisis that the ratings companies downgraded them for in anticipation of possibly happening. Funny how that works out.

Right, that's the only effect of the euro itself; you cannot use quantitative easing to take off some of the pressure. But you can mimic the results of printing money through specific policies. For example, if wages are high and your labour is uncompetitive compared to other countries (big problem in e.g. Spain), then you could just print money and the relative cost of the wages goes down, making labour more competitive. However, you could also just slash wages.

Slashing wages or artificially making them stagnant is horribly counterproductive, especially in the situation Spain is in. Their real wages have fallen, what, 5% so far? You're simply not going to reinvigorate consumer confidence with austerity, the evidence is just overwhelming that it just does not work. You need to have control over your money supply and the ability to deficit spend to accomplish this, it can't be mimicked. The only option Spain has is to drastically cut everything and it's only making their recession worse and worse as they cut more and more.

Or a problem could be that you owe too much money to a few foreign big parties, then you could print money and decrease the value of your debt. However, you could also agree a coluntary partial default with those parties (a haircut), to which those parties might agree becuase they know it's better than losing everything in a complete default.

This I can agree on, depending on the circumstance.

Finally, if you need money you could print it and all creditors that hold your currency would relatively lose some money because what they have becomes less valuable. However, you could also diretly levy this money through a tax. What's happening in Cyprus is exactly that, and there isn't anything more being 'stolen' than what would have happened in the situation that you propose (i.e. printing money); at least not from the point of view of the common account holders. That's my point.

You're saying that the effects of currency devaluation from printing money would be roughly equal to losing money via the tax levy, right?

Well I don't really know if that comparison really makes much sense. Purchasing power isn't being changed. Devaluation is a side effect of monetary policy and can be controlled if you make the right policy choices; a tax levy on deposits is a breach of trust with massive implications.

[Ceratisa]

Question couldn't the decreasing value of the currency lead to hyper inflation?

[Feoric]

At 3/19/13 03:55 PM, Ceratisa wrote: Question couldn't the decreasing value of the currency lead to hyper inflation?

No, that is an extraordinarily difficult thing to accomplish.

[Ceratisa]

At 3/19/13 04:20 PM, Feoric wrote:

At 3/19/13 03:55 PM, Ceratisa wrote: Question couldn't the decreasing value of the currency lead to hyper inflation?

No, that is an extraordinarily difficult thing to accomplish.

So it would take more a government collapse to trigger that?

[Feoric]

At 3/19/13 04:22 PM, Ceratisa wrote: So it would take more a government collapse to trigger that?

It takes a lot of specific things to happen, a "government collapse" isn't necessary but it's usually a good indication that the variables are there. There's a reason why there are only a handful of examples of actual hyperinflation scenarios in modern history. There has to be a mixture of bad policy decisions and the right initial conditions for such a catastrophic event. Generally speaking, inflation is a normal part of a healthy growing economy and it doesn't just happen overnight unless there is a snap devaluation such as the Argentinean debt crisis of 1980's or the 1998 Russian financial crisis.

If you live by this one simple rule you will be much more informed than the general public and will live a healthier happier life: anyone who uses the term hyperinflation in relation to any economy not currently based on trading sea shells is guaranteed to be a fucking moron, so do not listen to them.

[Iron-Hampster]

At 3/19/13 03:31 AM, Feoric wrote:
The interest on money in a deposit account has nothing to do with currency devaluation.

They actually do interact with each other and the relationship between the two also affects the rest of the economy. First, Low interest rates from the central banks encourages inflation, and lowers interest rates for consumers. Second, when the rate of inflation surpasses the rate of interest, it discourages people from investing and instead to start hoarding assets and/or putting their money else where, most likely a country that has less inflation and little to no taxation.

hyper inflation.

Not happening.

I wouldn't underestimate the stupidity of idiots if I were you. If "crashing economies for idiots" were a real book, the Eurocrats would have a copy for everyone and instructed them to "try everything".

[Feoric]

At 3/19/13 08:15 PM, Iron-Hampster wrote: They actually do interact with each other and the relationship between the two also affects the rest of the economy. First, Low interest rates from the central banks encourages inflation, and lowers interest rates for consumers.

I think you're confused (and I can't blame you). The Cypriot banks we're taking about here, the ones with the deposit accounts that (will?) be taxed are not central banks. Cyprus, as we all know, is in the Eurozone. The institution that dictates their monetary policy is the European Central Bank, or the ECB. Cyprus does actually have a central bank, but Mario Draghi (the President of the ECB) is in charge of setting Cyprus' monetary policy, not Cypriots themselves.

Secondly, interest rates on deposit accounts and interest rates on bonds are two completely separate topics. I assume you're talking about the latter. Low interest rates promote consumption instead of saving, and therefore increase demand for goods and services, which generally does lead to inflation. Jacking up the interest rate encourages saving over consumption, which reduces demand for goods and services, which reins in inflation. Monetary policy in the late 1970s and early 1980s was centered around keeping interest rates fairly level and fairly high, so as to combat "stagflation." The ECB can't do this efficiently because there's no one size fits all monetary policy (Krugman does fantastic analysis and commentary on this, although his predictions are admittedly off). This goes back to what lapis was saying: his argument is that for Spain to remain competitive, wages need to go down. You can make the same argument for Portugal. And those are fair points! But my retort is this: perhaps you can't get Spanish/Portuguese workers to be as productive as German workers without compensating them similarly. This is a big problem, because in order to for that to be sustainable, the EU needs to federalize the Euro so there's a constant transfer of payments between nations.

when the rate of inflation surpasses the rate of interest, it discourages people from investing and instead to start hoarding assets and/or putting their money else where, most likely a country that has less inflation and little to no taxation.

Guess what? This is what we have in the States right now: negative real interest rates. Are people discouraged from investing in us?

I wouldn't underestimate the stupidity of idiots if I were you. If "crashing economies for idiots" were a real book, the Eurocrats would have a copy for everyone and instructed them to "try everything".

They're already doing this.

[HipnikDragomir]

Way to represent, Cyprus. My mom called me and said it's a mess there. Cops beating people just trying to get their money back.