I have written before on the subject of fractional reserve banking.  I believe the federal government and central bank enable fractional reserve banking, at least to a large degree.  While I don’t necessarily think it is good practice, I don’t necessarily view it as a criminal act, particularly if there is no intentional fraud.  If banking customers are aware that their deposits are being used by the bank (and in return probably getting higher interest rates or lower bank fees), then the banks should not be held criminally liable if depositors cannot be made whole.

The subject of fractional reserve banking has been a hotly debated topic within the Austrian school of economics.  Many of the heavy Austrian hitters think it should be illegal, but I’m not exactly sure what they think the penalties should be.  Would bankers go to jail in their world or be personally liable?  I’m not sure that there is any standard position.

I should note that (and this, I believe is consistent with Mises’ position) in a world with free banking and no government backstop, fractional reserve banking would be far more limited.  Threats of bank runs and bankruptcy would tend to keep banks in check.

I found it interesting to read recently, Chapter 8 of The Case Against the Fed, written by Murray Rothbard.  It was published as an article on Mises.org.  I read this book about 10 years ago when I was just getting entrenched into libertarianism.  It was the first full book I read on the Fed.  I did not remember the first paragraph of this chapter.  Rothbard started the chapter as follows:

“The fractional-reserve banker, even if he violates his contract, cannot be treated as an embezzler and a criminal; but the banker must still fact the lesser, but still unwelcome fact of insolvency.  There are two major ways in which he can become insolvent.”

The rest of the chapter is mostly irrelevant for the purposes of this discussion.  I wish Rothbard would have expanded on this one short paragraph, whether in this book or anywhere else.  This did not stick out to me when I first read the book.  It stuck out at me immediately when I recently read this.

I had always wondered how Rothbard could hold the position he did in regards to fractional reserve banking.  Rothbard was a hardcore libertarian.  In fact, he was proud of the fact that he was an anarcho-capitalist.  Yet I could never understand how he could hold such a position on fractional reserve banking, at least from a moral aspect.

By the way, it is not inconsistent for an anarcho-capitalist to believe it should be against the law to murder, rape, steal, etc.  It is just a question of whether the law should be upheld by a monopoly state.  But in the case of fractional reserve banking, it is hard to say that it is a violation of the non-aggression principle, particularly if banking customers are aware of what the bank is offering and doing, at least in general terms.

So all along, I thought Rothbard wanted to throw bankers in jail, or at least make them pay restitution from their personal funds.  But this one paragraph contradicts everything that I thought about Rothbard and his views on the subject.  Everything else I have read by Rothbard indicates that he thinks a fractional-reserve banker is a criminal.

For Rothbard just to say that the banker must face the “unwelcome fact of insolvency” is obvious, at least to libertarians.  I don’t think many libertarians would disagree with this position.  Of course banks should face insolvency.  Most hardcore libertarians are against the FDIC and the Federal Reserve, regardless of their thoughts on fractional reserves.  Without the FDIC and central bank, then banks would be subject to insolvency like any other business.  I don’t know of many libertarians that advocate government bailouts.

There is, of course, a great difference between a banker facing criminal penalties versus facing insolvency for his business.

It makes me curious if Rothbard wrote more on this subject that I am unaware of.  I have been curious about his position on this one subject for a while now because I found it inconsistent and I highly respect his work in general.  If Rothbard were alive today, maybe I would find more agreement with him on this issue than I originally thought.

There are a lot of problems with Cyprus.  Actually, there are problems everywhere, but I am picking on Cyprus right now because of the government’s confiscation of bank deposits.  While this is a major blow to the country and to anyone who has high deposits in a Cyprus bank, there is an even bigger problem.  The bigger problem is that this so-called solution of confiscation will not fix any of the problems in the long term.

Right now, it is hard to say that banks in Cyprus are open.  They are open under tight rules.  There are cash withdrawal limits and severe capital controls.

How do people pay their mortgages?  How do they pay their other bills?  What do the banks and businesses do that are owed money and aren’t getting paid?  It is one big wave of bad effects.

Travis Holte posted this on the LRC blog.  I have no reason to doubt its validity.  Even if it weren’t real, this is the reality of the situation.  It shows the bank account statement for a business owner in Cyprus.  The total balance is almost $850,000.  The blocked funds are over $720,000.  The owner says, “The business is definitely ruined, all Cypriot workers to be fired.”

Money is vital in an economy.  It is at least half of most trades and transactions.  You buy something and pay money.  You sell something and you receive money.  You work (sell your labor) and you receive money.  If you don’t have a functioning medium of exchange, then business will slow down or come to a virtual halt.  There will be a severe contraction in the division of labor.

This is the reality for Cyprus right now.  It cannot go on with severe capital controls and a completely untrustworthy banking system.  Something has to change quickly or the standard of living there is going to plummet.  It is going to go down regardless.  But if the government would allow a true correction to happen without bailouts and more government involvement, then there would at least be some hope for a decent recovery in the near future.

Most major countries in the developed world are facing something similar to Cyprus.  It is not exactly the same, as some countries have their own central bank and fiat currency, which allows them to conceal the confiscations easier.  But there is way too much government all over the globe.  Almost all government spending is malinvestment.  Governments misallocate resources and don’t have the free market pricing mechanisms to correct for it.  This wastes resources and makes our standard of living lower than it should be.

I don’t think there was much choice in bank depositors taking a haircut.  It should have been handled as a bankruptcy.  This is the trouble when governments insure banks.  A bank that engaged in heavy fractional reserve banking or a bank that invested in risky assets (like Greek bonds) would likely never receive insurance in a voluntary free market.

If we had a free market system in banking, then customers would be far more careful with their deposits.  Banks would likely be far more conservative and would not engage in this severe form of fractional reserve banking, if at all.  I can envision competing banks.  One bank might have fractional reserve banking.  You could be a customer of the bank and getting higher interest rates, knowing that your money was more at risk.  Then you could have another competing bank where you pay a small fee and the bank does not engage in any fractional reserve lending on checking deposits.  Conservative savers could use this bank to keep their money safe and sound.

We have nothing resembling a free market in banking now, whether in the U.S., Cyprus, or any other developed country.  The government makes these ridiculous promises and then the banks take these big risks, knowing they will be bailed out if they turn out to be wrong.  Until this is fixed, we will continue to see problems around the world.  We need a free market in money and banking.

I see stories often about people who are older who all of a sudden want to start saving for retirement.  They don’t know what to do or if it is worth it to even start.  Or they may be wondering if they can play “catch up” and still be able to retire at a decent age.

For this post, I am mostly talking about people in their 50’s and early 60’s, although some of the points could apply to almost any age.

It is common to hear stories of people in their 50’s with almost no net worth, except for a little bit of money in a checking account.  Even worse, there are some who actually have a negative net worth due to debt.  A more typical story of a middle class American might be someone who is 55 years old who has 15 years left on his mortgage, but has only $10,000 in savings (outside of home equity).  Then the person wonders if he can retire at age 65.

The answer is usually “no”.  Unless, in this particular example, the person makes a really high income or is about to come into some big money, then there is almost no chance for a comfortable retirement at age 65.  There is simply too much catching up to do and he won’t have the major benefit of many years of compounding interest.

So in this example, should the person bother trying to save at all?  My answer is unequivocally “yes”.  It is better to do something than nothing.  The person who is 55 years old is better off saving $5,000 over the next year than not saving it.  It provides a little more cushion in case of a loss of employment or some kind of emergency.  It is a small start to saving money, even if just modest.  Even if the person has to keep working way beyond 65, maybe he would have a chance for retirement at 75 instead of not at all.  Or there is the worse option of living in extreme poverty later on.

I am not sure why some people come to a realization of the need to save later in life.  Perhaps retirement just isn’t that far off any longer.  It is possible that some people were just barely scraping by and couldn’t find a way to save.  But this just shows the importance of doing the little things.  If you can just save 20 dollars per week, this will add up to over a thousand dollars per year.  If you do this when you are in your 20’s and you can make small increases in your savings amount each year, then you can accumulate some real savings over time, assuming you make smart investments and we don’t have some kind of a disastrous hyperinflation scenario.

I have written before about measuring how much you need for retirement.  Inflation makes it difficult, if not impossible, to figure out.  But I think the new reality is that most people are going to have to look beyond 65 years old and consider working at least part time after this age.  There will be major changes in Social Security and Medicare because of the massive unfunded liabilities that can’t be paid off.  The government retirement age will go up.  You can absolutely bet on that.

I wouldn’t rely on anything from Social Security.  If you want to retire at 65 or before, then you better have a high net worth, well over a million dollars.  Ideally you will have income producing assets like investment residential real estate.

I think everyone’s situation is unique.  But if you are in your 50’s or 60’s or even older, and you realize that you don’t have enough savings, then start doing what you can to increase your income and decrease your expenses.  Maybe you can make a really bad situation into a moderately bad situation.  Or maybe you can make a questionable situation into a good one.  You have to take the steps necessary to slowly build wealth over time.  It is better if you start really young, but it is never too late to start.

There are people all around who are constantly making bad financial decisions in their lives.  Some of these decisions are just really bad and benefit nobody.  Some bad decisions may benefit one other individual or a small group of a individuals.  Someone with a major gambling problem loses a lot of money and the casino owners benefit.

But there are also some widespread financial errors in which you can benefit in your everyday life.  You should thank these other individuals for their bad decisions that enable you to gain an edge.  Of course, I would just say “thank you” inside of your head and not literally to their face.

You can thank all of the people out there who don’t pay off their credit card balance each month (with the exception of those who have 0% interest).  This allows credit card companies to offer bigger rewards, including cash back.  So you can use your credit card, delay the payment coming out of your checking account, pay off the balance each month so that you don’t pay any interest, and, in most cases, you are still just as eligible as anyone to get cash back or other rewards for your purchases.  If we didn’t have all of these people with high credit card debt paying high interest, then this would not be possible.

You can thank all of the people who do regular food shopping at drug stores and convenience stores, where the prices are usually marked up significantly.  It makes little financial sense to do your regular shopping in these places in most cases.  It is far cheaper at a grocery store, or even more so at Target or Walmart.  But if I ever have an emergency where I need some milk or butter, then I can run into a gas station convenience store, maybe even on a major holiday, and get what I need.  I would never do any large purchases at one of these convenience stores unless it was an emergency.  But in this case, they really can be “convenience stores”.  I’m not sure if they could stay in business though if it weren’t for their “regulars”.

You can thank all of the people who make monthly payments on their car insurance and homeowners insurance when they have the option of paying it in full upfront and getting a significant discount.  You can often save hundreds of dollars over a 6-month period over over an annual period, just by paying it in full at the beginning.  This is huge savings, especially when you can’t even get a 1% interest rate on your savings in a bank.  If it weren’t for all of those people making monthly payments (probably because they live paycheck to paycheck), then these significant discounts would probably not be available.

On a bigger scale, you can thank the Chinese government and all of the Chinese workers who export inexpensive products to the U.S.  If the Chinese would simply let their currency strengthen and not be obsessed with exporting, then the Chinese people could consume much of what they produce.  Instead, they prefer to subsidize American consumers, while buying overpriced U.S. government debt.  I’ll take the subsidy while it lasts.

What other things can you think of where you can benefit at the expense of others because of their poor financial decision making?  They are often all around us, yet we never stop to think of them.

Tom Woods, one of the top libertarian thinkers of our time, has written a piece about state nullification. As he has done in the past, he argues that states have a right to nullify federal laws, regardless of what the U.S. Supreme Court says.  He argues his side from all different avenues.

I think it is important to make arguments using various avenues.  There are moral arguments, Constitutional arguments, and just common sense arguments.

One of the things that Tom Woods has argued is that the Supreme Court is an arm of the federal government.  So why would we depend on it as the final decision maker?  He is absolutely correct.  The Supreme Court justices are nominated by the president and approved in the Senate.  But regardless, would we really want to give dictatorial power to 9 people in robes?

I would like to take this whole thing to its logical conclusion.  Let’s say that someone argues that state nullification, let alone state secession, is impermissible.  It doesn’t matter whether the person arguing this point is trying to use a Constitutional argument or just giving his opinion.  This person is basically giving his consent to a dictatorship.

Let’s say the president issues an executive order that mandates all babies to be bottle-fed.  Mothers are no longer allowed to breast feed because it is unfair that some working mothers don’t have the same opportunities as stay-at-home mothers.  It is not equal, therefore the president orders all breast feeding to stop in the name of fairness and equality.  If you don’t like my example, pick another example of a law that you would strongly disagree with.

But you and many of your fellow Americans do not like this executive order.  You think the executive order is unfair.  You think it is illegal because the president didn’t get legislation passed by Congress.  But even if Congress passed something, you still deem it unconstitutional, aside from the fact that it is tyrannical and does not belong in a free society.

So someone challenges the ridiculous “law” or executive order to the U.S. Supreme Court.  But let’s say the U.S. Supreme Court upholds the executive order.  Let’s say that the Supreme Court rules that it is looking out for the general welfare and is therefore constitutional.  According to the anti-nullification crowd, that is the end of it.

Of course, you could come up with even more outrageous examples, whether you think they are realistic or not.  Maybe the president declares a national emergency and declares himself (or herself) dictator.  If the Supreme Court upholds it, then that is the final word.  Unless you can appeal to your so-called representative in Congress to impeach.  But maybe the new dictator will just declare that he can’t be impeached.  After all, he is the dictator.  As long as the Supreme Court upholds everything, then the anti-nullification crowd can’t really complain too much.

The choices here would be a revolution or some kind of nullification or secession (or accepting slavery).  So the anti-nullification/ anti-secession people are either in favor of violent revolutions or else they are in favor of giving dictatorial powers to the federal government.

They can say that “it can’t happen here” all they want, but do they really know that.  What if it did happen here?  Would they then deem it ok for states to nullify or secede?  And who is to decide what goes over the line?  These are some tough questions that the anti-nullification crowd needs to answer.

It looks like the European Union will bail out the Cyprus banks to the tune of 10 billion euros, which is approximately $13 billion.  Of course, this is pocket change to the United States.  The U.S. government spends (wastes) that much in less than 2 days.  I predicted in my last post that there would be some kind of bailout deal, because there is no way they were going to allow the banks to go under.  It would have spelled almost immediate trouble for troubled banks in other troubled countries.  It would have meant the breakup of the European Union.  Instead, they will try to kick the can down the road one more time.

The latest “deal” will take huge amounts from the big depositors.  It will hit anyone who has over 100,000 euros in deposits in the troubled Cyprus banks.  This will affect rich Russians, who really should have known better.  When an institution is offering above-normal interest rates, it should be a sign that something may be wrong.

There are some lessons that Americans (and others) can learn from this whole debacle.  The first lesson is that you should never have bank deposits in any one bank that is above the FDIC limit.  That limit is currently $250,000, which went up from $100,000 after the fall of 2008.  It is completely unnecessary to have this much in deposits in any one institution and perhaps foolish anyway because you are losing so much to inflation.  Unless you have a net worth of $5,000,000 or more, there is absolutely no reason to have this much liquid savings in one bank.  And if you are worth more than that, then you should have a great tax attorney who specializes in international banking and foreign investments.

Another lesson we can learn from Cyprus is that the big banks will almost always be saved (or nationalized).  The governments of the world will simply not allow the big banks to fail because their whole system depends on them.  The big banks and the government work hand in hand and depend on each other (not in a good way).  So while I think the Federal Reserve would tell Congress to balance the budget to avoid hyperinflation, I am not as certain about what the Fed would do with the banks.  Would the Fed risk hyperinflation to save the banks?  I think this is the one major danger that we face.

Unfortunately, the whole banking system is a mess.  Banking is a legitimate business that should serve society like any other business.  A bank should be a place where people can deposit their savings for safety.  A bank should be a broker or an intermediary between lenders and borrowers.  Banks should serve useful functions.

The problem is that the government, through the Fed and the FDIC, has created unprecedented moral hazard.  The big banks can be almost certain that they will be bailed out if they get into trouble.  This encourages them to take on risky bets, whether they be mortgage-backed securities or Greek bonds or something else.  The banks are being bailed out now as we speak.

I don’t really agree with those who say you should take all of your money out of the banking system.  While the system does rest on confidence and the ability to be bailed out, it probably won’t go down.  As stated above, the big banks will almost always get bailed out.  If the FDIC doesn’t make good on a promise, then the whole system may collapse.  So I think your money is probably safe, as long as you don’t go over the FDIC limit.  If it isn’t safe in an American bank, I’m not really sure that you can find complete safety anywhere.  And even under a mattress is not complete safety, for several reasons.

With that said, you should always diversify your assets.  You don’t want all of your eggs in one basket and this would include any banks, foreign or domestic.  But if the banks go under in the U.S., then you better live on an isolated island with plenty of food.  This might be one of the few scenarios where the preppers could actually be right.

The Cyprus government and the European Union are trying to reach a “deal” still as I write this.  The original proposal was for a bailout of Cyprus, but in exchange, the Cyprus government would seize the money of all depositors in Cyprus banks, from 6.75% to almost 10%.

As I pointed out, this is just a direct way of taking the people’s money.  The same thing happens in the United States and elsewhere, but just in a more underhanded way.  The U.S. uses the Fed and monetary inflation to accomplish the same thing.  It is just that the seizure of savings happens to everyone, not just bank depositors.  It happens to anyone holding U.S. dollars.  It is more spread out and it is done in a hidden way, but the results are similar.

The one result that is different is the reaction of the people.  In Cyprus, the people started protesting en masse because of this proposal for a one-time seizure or tax.  Yet these same people never revolt against the government that wastes far more resources in less than a year’s time.

The other interesting thing is that depositors in Cyprus banks have done quite well up until last week, earning high interest rates (to reflect the risk).  Peter Schiff wrote a nice article explaining the irony.

When the people protested and the Cyprus legislature originally backed down, some politicians were criticizing the people saying that it was being done for their own good.  How many times do we hear this from politicians?  But in this particular case, I almost wonder if it isn’t true.  Most of the people in Cyprus would lose 6.75% of their bank savings.  The higher rate would only apply to people with far more wealth, most of whom are Russians.

So the Cyprus government and the Cyprus banks would get a massive bailout (relative to the size of the country) and most people would still have over 93% of their bank savings left.  But if the people revolt so much that they force their legislature into turning down a deal, then things will really get interesting.  If there is no bailout at all, then the Cyprus banks will probably go under.  A few people may get to the bank in time and get their money out.  Most won’t.  So instead of 93%, most people will be staring at a zero balance in their bank account.  Perhaps if the banks went through a formal bankruptcy and sold off all of the assets, then depositors might get back a fraction of what they had, and this would likely be months later.

In other words, be careful what you ask for.  The Cyprus banks, especially the major ones, are insolvent.  They are even more insolvent after the proposal to take depositor money.  If they ever reopen, there will be a major run.  So while I like to see a good protest against the government, I’m not sure if the people are shooting themselves in the foot in this case.

I think we will ultimately see some kind of a rescue (bailout).  I don’t think the European Union will allow for the Cyprus banks to go down.  They don’t really care much about Cyprus, but they are afraid it will shake the confidence in the rest of Europe.  It could potentially start more bank runs in fragile places like Portugal, Spain, and Italy.

Governments and central banks around the world have made such a mess of banking that it is a tough topic for libertarians.  We have to remove the moral hazard, but it is hard to take a purist libertarian stance in the sense of trying to do something all at once.  The whole banking system is a mess and it is hard to just say “let them fail”.  If the average American started seeing bank failures where the FDIC did not step in, then we would see massive bank runs.  Many people would be wiped out.  We would see a drastic decline in the division of labor.  I think we need to get rid of the FDIC, but it is one of the few things where I think it might be more harmful than good if it was done overnight without some kind of a plan of transition.

This whole Cyprus situation just shows how fragile the whole banking system is.  It really does all rest on confidence.  I think that bailing out the banks is the one situation where the Fed would risk hyperinflation.  The Fed will eventually tell Congress that it will stop buying its debt.  Congress will have to figure out a way to balance the budget eventually.  The Fed will not turn its back on the major banks.

Keynesians seem to love government debt.  They wouldn’t exactly put it that way, but that is the only conclusion one can come to after listening to most of them.  They will say that the debt doesn’t really matter much and that any negative effects are more than offset by the positive stimulating effects on the economy.

Supply-siders can vary in opinion on government debt.  When a Republican is in the White House, they will typically say that debt doesn’t matter much, as long as we enact policies where we can grow our way out of it.  If a Democrat is in office, then they are more likely to criticize government debt as being a burden on future generations.

Austrian school economists (advocates of free market capitalism) are consistent in opposing government debt.  While I am completely against having any kind of a deficit, I do agree with Ron Paul in that the overall spending matters.  I would rather see a deficit with a $1 trillion per year budget, than a balanced budget where the government is spending $4 trillion per year.

Austrian school economists do differ in how they view the overall debt and its effects on prosperity and future generations.  There are also differing views on how to deal with the debt.  Some say we should pay it down or grow our way out of it.  Others say that it should all be repudiated (meaning a default).

My opinion (although I think it is fact) is that government debt burdens future generations only in the sense that it currently reduces savings and capital investment, which will mean less advancement in technology and capital goods for the future.

If future generations continue to honor the debt previously run up, then it will cause a redistribution of wealth, but much of the redistribution will occur between individuals.  Even debt owed to the Social Security fund will mostly end up back in the hands of individuals and not spent by government.  This would be the worst case scenario for future generations.  More likely though is that much of the debt will be repudiated, whether deviously through inflation or outright default.

But let’s forget future generations for now.  That is what most people seem to discuss when talking about the dangers of high debt.  But where it matters the most is right here and right now.  The government debt is what allows the government to spend massive amounts of money.  There is no way that the government would be able to raise taxes enough to pay for all of its spending, so it must resort to debt.  Without a central bank and fiat currency, lending would be very limited and interest rates would quickly rise with high levels.  But because of the Federal Reserve’s monopoly over the supply of U.S. dollars, it enables the government to accumulate massive amounts of debt and spend what otherwise would be almost impossible.

So what most people fail to understand is that the massive deficits make us poorer now.  It hurts our standard of living.  It is because government is able to spend huge amounts of money.

Why is this so harmful?  It is because virtually everything the government spends is a misallocation of resources.  Even if politicians really did care about the little people, they would have no idea how to quantify the wants and needs of hundreds of millions of Americans.  So while not all money spent by the government is completely wasteful, it is almost always wasteful in comparison to how it would have been used by those who earned it.

In conclusion, government debt does matter.  But where it matters the most is here and now.  It allows the government to misallocate and waste resources on a massive scale.  We are all poorer because of it.

The FOMC has finished up its March 2013 meeting and released its infamous statement.  In short, the news is that there is no news.  It is full steam ahead for the Fed.  It will continue to wreck our money and our economy by creating $85 billion per month out of thin air.

The FOMC statement said, “Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices.”  Apparently the “Committee” hasn’t looked at the stock market.  But since that is not considered a consumer good, it doesn’t count, just like the housing bubble didn’t count.

There was one dissenting vote against the FOMC policy.  Esther L. George voted against the action out of concern for future risks and that it could cause an increase in long-term inflation expectations.  Apparently the others don’t share the same concern, or at least not enough to vote against increasing the monetary base by $85 billion per month.

The statement also included language about keeping the federal funds rate at between 0 and .25 percent, as long as the unemployment stays above 6.5% and inflation expectations remain below 2.5%. Of course this whole thing means almost nothing, since the Fed can just change its stance on this at any time.  In addition, the Fed isn’t even directly keeping the federal funds rate low now anyway.  It is the massive excess reserves held by banks that is keeping this rate down.  With huge reserves, there is little need for overnight borrowing.

So for now, we can continue to expect the Fed to help fund the government’s deficit to the tune of $45 billion per month.  We can also expect the Fed to continue to bail out the banks.  The Fed will create $40 billion per month in new money to buy mortgage-backed securities that are undoubtedly worth a lot less than what is being paid for them.  The Fed calls it supporting the housing market.  I call it a bank bailout.  Who needs a Cyprus bank seizure when you can simply do it this way and conceal it?

This will continue to exacerbate the whole problem.  All of this monetary inflation is causing a further misallocation of resources.  It will all have to be corrected at some point.  The day of reckoning has already hit Greece and other parts of Europe.  The day of reckoning in America is yet to come, but it will come.  Prepare yourself.

Yesterday, I wrote about the drama happening in Cyprus with the banks.  There is a bailout being discussed that would include taxing (seizing) a percentage of bank deposits.  So anyone with money in a bank in Cyprus would take a hit.  Whether or not this goes through, the cat is out of the bag.  It opens up the potential for it to happen almost anywhere.

So what are the chances that something like this could happen in the United States?  My answer to this question is a vague one at first glance.  I think it is possible, but I doubt it would happen in the same form.

I read several articles about the Cyprus banks when the news came out.  The most interesting reading were the comments at the bottom of the articles (mostly American, but perhaps a few British comments too).  Almost all of the comments were negative towards the bailout scheme.  Many were principled stands in favor of property rights.  But one comment I saw a few times was about how it is already happening in the U.S.  Bank depositors (which is most adults) are having their money seized from them on a daily basis.  They just don’t know it.

I saw one person make an analogy of putting a frog in boiling water.  In the U.S., the frog was not placed in hot water.  It is gradually coming to a boil and the frogs are not noticing (at least as much as they should).  In Cyprus, they just threw the frogs right into the boiling water, so they are revolting.

There really isn’t much difference between devaluing the currency through monetary inflation and directly seizing money sitting in a bank (which is really mostly digits).  The bank confiscation is more direct, more noticeable, and more immediate.  The inflation is a bit slower and more subtle.

I doubt that we will see an action like this in the U.S.  First, the U.S. government and central bank will learn from the chaos in Cyprus.  By seizing money directly, it just encourages people and corporations to withdraw their money and find another place for it.  Another place could include a foreign bank, stocks, gold, housing, or under a mattress.  Actually, taking money and putting it into a foreign bank or under a mattress are really the only ways out of this list that actually gets the money out of the U.S. banking system, and even putting it in foreign banks is questionable.  But regardless, the U.S. government does not want to see a run on the banks and will therefore not try what the government of Cyprus trying.

Secondly, there is no need for the government to do this.  As I just mentioned, you can get the same thing accomplished through the Federal Reserve.  Does is really matter if the government directly takes 10% out of your checking account or does it by increasing the money supply by 10%?  Either way, you have lost purchasing power.  The only difference is that the monetary inflation is more subtle and is not as likely to cause a revolution.

Another thing I’ve seen mentioned with this whole incident is the possibility of the U.S. government going after 401k plans and other retirement accounts.  I have discussed this before.  I am glad that people are talking about this because it makes it less likely to happen.  I think the government will try this, but it will be subtle at first.  We can only hope that enough Americans will get really mad if and when the politicians try.

In conclusion, if you are an American with savings in a bank account, you are already having money seized from you, unless it is in something other than currency.  The Federal Reserve will continue to devalue your money for as long as it can get away with it.  There will be no direct confiscation because it isn’t necessary.  Why do that when you can do the same thing in another way, without causing a major revolt?