We've Just Been Set Up For Another Great Depression EU Bankers Have Initiated A Surprise Assault On The Precautionary Savings of Their Own People. This Is A Nuclear War On Savings And Wealth!

David Zervos: ’This Is A Nuclear War On Savings And Wealth’

Jefferies strategist David Zervos is his typically restrained self in his latest note on the Cyprus bailout, which involved taxing all bank depositors in a one-off confiscation:

What happened to Cyprus on Friday evening was one of the most significant developments in the Eurozone since the Greek election last summer. To tax the bank deposits of savers sends an ominous message to the entire global investment community. All of us should really take a moment to consider what the governments of Europe have done. To be clear, they initiated a surprise assault on the precautionary savings of their own people. Such a move should send shock waves across the entire population of the developed world. This was not a Bernanke style slow moving financial repression against risk free savings that is meant to stir up animal spirits and force risk taking. This is a nuclear war on savings and wealth – something that will likely crush animal spirits. This is a policy move you expect from a dictatorial regime in sub-Saharan Africa, not in an EMU member state. If the European governments can clandestinely expropriate 7 to 10 percent of their hard working citizen’s precautionary savings after the close of business on a Friday night, what else are they capable of doing? Why even hold money in a bank account? Are they trying to start a bank run?

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Warning! They Just Admitted It, They Won’t Stop At Just Cyprus!!

S&P Warns of ‘Socially Explosive’ Situation in Eurozone

Cyprus Bailout: Welcome To Another Great Depression

So, this is going to be a very sour reading of what has happened in Cyprus this weekend. It will also be a very partisan one, possibly even a partial one. But if Milton Friedman and Anna Schwartz were right in their insistence that it was actually the Federal Reserve that caused the Great Depression (which is something that Ben Bernanke himself has insisted that the Fed will not repeat) then one way of interpreting what has happened is that the European Central Bank has just set us all up for another Depression. The trigger is that “tax” of a little over 6% on all depositors.

This isn’t an analysis that you’ll be able to get all economists to sign up to. But the basic story told by Friedman and Schwartz in “A Monetary History of the United States” was that the 1929 crash was indeed a serious crash. But it would not have led to the Great Depression without the Federal Reserve making some serious mistakes. Two of which were to allow the intertwined collapses of both the money supply and the banking system. Given that it is the banks that create credit and thus the wider money supply they are, to a great extent, the same thing.

The actual process was the series of bank runs that happened through the early 1930s. The problem is that in a fractional reserve banking system banks are inherently unstable. The fractional refers to the fact that when you deposit $100 with one they don’t then keep that $100 in the safe. They take a guess at how much they need in the safe (OK, it’s an informed guess, but it is a guess) for when people turn up demanding their cash and the rest of it they lend out to other people. This is how companies, mortgages and business loans are financed (please, we don’t need to go into “ but loans finance deposits” and all that: it might even be true but it’s irrelevant here). 

In 1941, The Federal Reserve Wrote A Letter Explaining Why The Cyprus Bailout Was Such A Terrible Idea

The main reason why people are going crazy this morning over the “Troika’s” (EU, IMF, ECB) bailout of Cyprus is the one-off 9.9 percent tax all Cypriots with over 100,000 euros will be charged, and 6.5 percent if you have less.

It seems shocking, but the concept isn’t that novel.

As Sky News’ economics editor Ed Conway points out this morning, in 1941, the Federal Reserve responded to an inquiry on why American deposits weren’t taxed, since it would be so easy to administer and would produce so much revenue.

Perhaps, the Fed said, it could be done.

But such a tax would also violate “one of the fundamental principles of taxation in a democracy.”…

CONFISCATION: Panicked Europeans Rush ATMs as Leaders Move To Seize Funds Directly From Bank Account Holders

For those who don’t believe the government is prepared to take extreme measures that may include the seizing of retirement accounts, cash savings or even gold, look no further than Cyprus, the latest recipient of bank bailouts.

Read more at http://investmentwatchblog.com