What, exactly, is money? And what does it mean to “save”? Does this help?
A penny saved is a penny earned.
An old proverb, often attributed to good ol’ Benjamin Franklin. Another, older version is:
A penny spared is twice got.
An old 17th century aphorism, collected by George Hebert.
That’s back in the days when a penny actually meant something. Now Canada, whose dollar trades roughly on par with the US dollar, has ceased minting pennies. The US should soon do the same, but they won’t — penny wise and dollar foolish, I suppose; it costs about two cents just to mint a penny.
Once upon a time, long ago, logic prevailed. People who worked hard and saved their money were rewarded with the glories of delayed gratification. By saving their money they could build a house, buy a car, build a business. They could fund an education.
But that was long ago, before central banks, currency manipulation, and before the PIIGS. For 100 years now savers have been punished by central banks who have the authority to conjure up money from thin air. Savings now not only don’t grow, they are slowly nibbled away, like Hemmingway’s Old Man and the Sea. To work and amass a respectable sum of money is a de facto surrender of those funds — slowly, almost painfully — to faceless government bureaucrats a thousand miles away.
This year alone, the US Federal Reserve Bank will “create” over one trillion dollars — partly in purchase of government bonds, and partly in purchase of mortgage backed securities. And Mitt Romney called the Chinese “currency manipulators.” HA!. The yuan is up 10% against the dollar in the past year.
Even the Swiss panicked, devaluing their franc (CHF) this past year, since a currency strong in relation to others leads to expensive (and hence weaker) exports. Next the Japanese, under Abe, are creating yen at Indy 500 pace, and the yen is down 15% against the dollar in the past few weeks.
It is indeed a race to the bottom. Many times in economics there are winners and losers. In this game, it is the saver who loses. And the debtor (mostly national governments) wins.
But now, over the past weekend in Cyprus, any veil of fairness and even-handedness has been violently ripped away. As a condition of EU and ECB (European Union / European Central Bank) bailout, Cypriot bank deposits will be summarily and immediately “taxed” between 6.5% and 9.9%. Simply extracted. Banks are closed, to preclude runs on the banks.
No story is simple and clean and easy to tell. Cyprus — that weird sort of two-state island, but not really a two-state island, that was somehow allowed into the euro-zone — is an off-shore banking center that would make the Grand Caymans proud. They’ve attracted lots of dodgy “dirty” money, particularly from crony-capitalist Russian magnates — so certainly there are “black hats” among the losers.
Nonetheless, here is a bald-faced signal that the world’s general governance is unfriendly toward savers. The euro dropped 1% today, March 18, as savers (i.e holders of euros) fled to US Dollars and gold. Imagine saving for your child’s braces, or your grand-child’s college education, house down payment, engagement ring for your financee’. And governments around the world are either printing money faster than you can save it, or confiscating it directly from your deposits. What would you do?
What happens in a world where no one wants to hold on to money? We buy things faster than we ought. We invest in other instruments faster than we ought. That’s what “they” want.
At this writing, Cyprus could still deny the EU and ECB their “down payment cum confiscation.” Banks are closed until Thursday (another 3 days). We shall see. To deny Brussels their “cut” would certainly risk eviction from the euro-zone.
On another front: a remarkable new party has sprung up in Germany, populated by intellectuals and economists, that favors dissolution of the current multi-nation euro; and — if that can’t be done — perhaps Germany should return to the Deutsch Mark. Oh, fun. http://www.rferl.org/content/german-anti-euro-party/24930655.html