The world has been slipping further into economic illiteracy over the past five years, with seemingly no country immune. From the United States, ostensibly still a bastion of classical liberal orthodoxy, we have seen rules enacted (and upheld by the judiciary!) that allows government to force consumers to purchase a specific product (in this case, health insurance). From the US and Europe, we also have a continued descent into monetary policy madness, with QE Infinity from the Federal Reserve promising “Quantitative Easing” until there is a change in inflation or unemployment and the European Central Bank (ECB) promising to defend the Euro, inflation be damned.
To be fair, these economic deviations and infringements on liberty aren’t really new or innovative: governments have always believed they knew what was best for us (and could compel anything), while the Keynesian cult has always worshipped at the altar of monetary policy as the panacea for the world’s ills. Indeed, these seem to be more of the same economic policies that have always emanated from the left and the disaffected, the belief that prosperity is a lever that originates in the office of the head of government.
However, the world may have hit a turning point with the ongoing Cyprus debacle, one that shows that the world’s economic compass may be irreparably broken. While Keynesians and the Krugmans and Stiglitzes of the world may warn about the dangers of “hoarding,” very few serious economists (and no Austrians) would argue that savings is an activity that government should be actively discouraging. Even in Keynesian formulations of Gross Domestic Product, first-year economics students are taught that savings = investment, an accounting identity that cannot be challenged.
Cyprus has changed all this. Reaching a bailout deal with the ECB, Cyprus has agreed to levy a tax on deposits above 100,000 euro to pay for portions of bailout, basically blaming depositors for entering a financial system that then “misbehaved.” The actions of the Cypriot government, in concert with the European Central Bank, seem to have broken the reality of the desirability of savings and elevated the survival of fractional banking (and its child, the Euro) to a level higher than mere economic growth. This inversion states that money isn’t a means of exchange, it IS exchange, and it must be protected at all costs… even at the cost of the real economy, distorted incentives, and a tax upon the prudent.
How bad is this action? The canary in the coal mine for most economic policy has even been breached: the Russian government has objected strenuously to the action (even as it has supported the bailout). Never mind the fact that Russia is worried about the action because it is Russian interests (and well-connected Russians) who will be hurt by these policies, nor by the fact that much of the Russian money parked in Cyprus is due to the bureaucratic nightmare that is Russia. These two points do not matter, because Russia is entirely correct in protesting this confiscation. And when Russia is exhibiting a better grasp of economics than you are, it is time to worry.
The question becomes then, what next? What depths will policymakers now plumb in the re-inventing of economics? Already the usual suspects have rallied behind the ECB’s bailout, with Krugman saying (predictably) that the Cyprus action was necessary to close loopholes in the still-weak global financial regulatory apparatus. Indeed, many are taking to the ramparts to assert that it was Cyprus’s status as an offshore tax haven that brought these problems upon the country, and thus it needed to be reined it. Unsavory types would be attracted to tax havens; to paraphrase a common Russian saying, why would we should save the guilty? Why would they be arrested if they weren’t guilty?
The real headline, unfortunately, has been the lack of reaction by the markets. Maybe they’ve been beaten down by the escalating lunacy of the past six years, and it will take a major catastrophe to shock them out of their complacency. Or maybe, as the world descends into a cozy corporatist stagnation, businesses are the last ones to complain about their strangulation. So long as their competitors do not benefit.
Stay tuned, because when a compass breaks, the first steps may lead you from the path… but the errors only compound over time. The world is going to get much more lost before it gets found.
Christopher A. Hartwell