Governments Race to Steal from People--People Race to Keep Their Wealth

“First they ignore you, then they laugh at you, then they fight you, then you win” – Mahatma Gandhi

Cyprus has been in the news quite a bit recently. The smallish, sunny island in the Mediterranean is to Russian mob money what the Cayman Islands are to wealthy Americans with funds from sketchy sources. But it is also a member of the European Union and as such part of the EU’s currency union as well. Its banks, swollen with euros converted from rubles far in excess of what could be lent on the island, made a lot of bad loans elsewhere and the Troika (the EU, the ECB and the IMF) has tired of propping them up. But the proposed solution, a “bail in” by depositors (in effect a tax, taking from them something north or south of 10%, depending on how much money they have and who is setting up the levy) strikes at the heart of the deposit guarantees that have been in place here and in Europe since the Great Depression. The banks in Cyprus are closed while the IMF pressures politicians there to do its dirty work even as investigators pore over the trove from IMF chief Christine Lagarde’s just-raided apartment looking for evidence she improperly okayed a 285 million euro payment for a French tycoon friendly to former (now indicted) French prime minister Nicholas Sarkozy. The Cypriot people, meanwhile, stand in long lines to withdraw their daily limit from ATMs in an effort to stem their losses (one story did surface of a woman there who anticipated the problem and was spared because for some time she has been withdrawing her life savings every Friday and redepositing it every Monday). As things stand now, Cyprus will be booted from the monetary union and left to the tender mercies of Russia, which covets her offshore gas fields.

Cyprus is a very tiny part of the global financial ecosystem, but that is like saying that the leak into which the Dutch boy stuck his finger was a very small part of the dike he saved. The problem is that the Troika wants to cut off someone else’s finger and use it, not one of their own—and the finger is attached to people whose fingers are accustomed to pulling triggers while their owners lurk in the shadows. But a Cyprus that has been kicked out of the monetary union sets a precedent for the departure of other nations from the monetary union: Portugal, Italy, Greece and Spain. And depositor flight in those nations would exacerbate their banks’ problems and accelerate the unraveling of the entire shaky structure. Already skittish Spaniards are increasingly downloading Bitcoin software and attempting to convert their Euros into a fiat currency no banker or government can confiscate. Greeks would be doing the same if it were not already too late for them. The Troika may be in a tighter spot than Cyprus.

Meanwhile, the Federal Reserve steals from everyone holding dollars by printing $85 billion each month and promptly sending it to prop up Europe, while banks in Switzerland institute negative interest rates (just another form of the same taxation facing Cypriots, only longer-term) and New Zealand openly declares that in the event of a fiscal emergency there they are quite ready to implement the solution just proposed for Cyprus. In fact what happened in Cyprus is not entirely unprecedented: in 1992 Italy levied all bank accounts a comparatively minuscule 0.6%. And let’s not forget that Argentina has just proposed a nationalization of private pensions and the U.S. government has reportedly been eyeing 401(k) plans as a source of funds. Not to mention those holding paper gold may find one day that their paper is just like what’s on rolls in their reading rooms—already tungsten-filled bars have appeared here and there in international trade. And those holding physical gold should not forget that FDR called everyone holding it hoarders and demanded they turn it in for dollars at the hundred year old federal rate, which he promptly adjusted way upward after collecting it all. In more recent times South Korea made it a matter of patriotic duty to turn in gold, and India has steadily increased taxes on it. The point should be crystal clear to anyone by now: your money is your money, until it isn’t. Governments feel entirely free to appropriate it (in whatever form you have it) when it suits them. And appropriating wealth is what governments will need to do: a Boston Consulting Group analysis has concluded that governments must get their hands on 29% of the wealth in private hands in order to meet their financial obligations.

Governments also do not warn. In the Tequila Crisis of 1995 President Zedillo of Mexico denied that the peso would be devalued until the night before it happened. Millions of Mexicans were instantly impoverished, as well as disillusioned from the prevalent notion that their nation was on a path to prosperity. Likewise, most of TV’s talking heads said there was nothing wrong with Lehman Brothers until it sparked 2008’s financial panic, even though quite a few analysts outside the mainstream media had been airing their worries for years ahead of the debacle.

It doesn’t seem you can trust what you’ve earned in anything or to the hands of anybody these days, and that notion puts a spotlight on the aforementioned Bitcoin. Bitcoin is a virtual currency developed in 2008 by cyberactivist Satoshi Nakamoto, existing only in cyberspace, backed by nothing and kept nowhere: no precious metal, no real estate, no government, no banks. The initial supply of Bitcoins grows only as computers that can be purchased by anybody for as little as $150 slowly solve mathematical puzzles that add “blockchains” of Bitcoins to the system. The “miners” owning those computers are compensated for their efforts with a few Bitcoins each time they are successful.

For a while Bitcoin was ignored by the world’s governments, and if it passed through a stage of being laughed at I didn’t notice. But last October the European Central Bank felt compelled to publish a 55 page paper attacking it as inimical to the stability of the world’s monetary system and the Financial Crimes Enforcement Network (FinCEN) has recently issued guidelines that would bring some Bitcoin participants (such as Mt. Gox) under anti-money laundering regulations. However, most participants are not regulated, and short of shutting down the Internet there is no way of eliminating the burgeoning Bitcoin system. Bankers and governments are entirely shut out of it, and will find themselves with few effective levers for doing anything about it.

The American Revolution was sparked not so much by a tax on tea but by two decades of ruinous British suppression of colonial scrip, the Bitcoin of its day—which prior to that had allowed the colonies to dodge the tyranny of adherence to the official British currency and thereby to prosper. The tax on tea was merely an attempt to recoup a little of what had been lost when the British had been forced to relent on the scrip issue. If the Founding Fathers had been presented with the notion of Bitcoin, they would have crawled naked over broken glass to implement it. It is a sobering measure of how much trust has eroded from the world’s banks and governments recently that people are now willing to entrust their earnings to mere ones and zeroes in cyberspace, entirely unattached to any “responsible” party.