Friday, January 3, 2014

One Way To Discourage Saving

The January 2, 2014 Telegraph reports on a paper published by the International Monetary Fund:
Much of the Western world will require defaults, a savings tax and higher inflation to clear the way for recovery as debt levels reach a 200-year high, according to a new report by the International Monetary Fund.
The IMF working paper said debt burdens in developed nations have become extreme by any historical measure and will require a wave of haircuts, either negotiated 1930s-style write-offs or the standard mix of measures used by the IMF in its “toolkit” for emerging market blow-ups.
“The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point,” said the paper, by Harvard professors Carmen Reinhart and Kenneth Rogoff.
What is a savings tax?
The paper says the Western debt burden is now so big that rich states will need same tonic of debt haircuts, higher inflation and financial repression - defined as an “opaque tax on savers” - as used in countless IMF rescues for emerging markets.
They mean what happened in Cyprus, where the government confiscated part of the savings accounts from banks, to bail out the government.  Talk about an incentive to pay off your loans, and invest in something that you can stockpile: food; ammunition; guns.  As one of the commenters pointed out: taxing those who were responsible and put money aside, to take care of those who did not.

UPDATE: Another commenter pointed out that the government of Cyprus did not confiscate the savings; it (under orders from Eurocrats) forced depositors to exchange savings deposits for shares of bank stock.  What Reinhart and Rogoff are proposing is actually a tax on existing savings.

11 comments:

James B. Shearer said...

They mean what happened in Cyprus, where the government confiscated part of the savings accounts from banks, to bail out the government. ...

That's not actually what happened. The banks were insolvent because they had made lots of bad loans and the government didn't bail them out.

Jon said...

This sort of thing really worries me. But how does one save up enough of a nest egg to generate a retirement income without putting it in some institution where the government can confiscate it at will?

Clayton Cramer said...

Mr. Shearer: This New York Times article http://www.nytimes.com/2013/08/22/world/europe/russians-still-ride-high-in-cyprus-after-bailout.html?_r=0 indicates depositors were forced to accept bank shares in exchange for deposits.

James B. Shearer said...

Sure the depositors lost a lot of money but it wasn't because the government confiscated it. When you deposit money with a bank you are in effect lending money to the bank. If the bank then loses the money by making a lot of bad loans the bank has no way of paying back all its depositors. By closing the bank (or as in this case converting deposits to bank shares) the government is not causing the problem it is just revealing it. The money was already gone through bad loans, the government didn't take it.

Clayton Cramer said...

Ah, yes, that is a real difference. These proposals from the IMF economists are thus worse.

Mauser said...

And 51% of my co-workers just voted to replace a guaranteed pension with a 401K type plan that AT BEST will return 35% less, and of course, can run out if you live long.

I'm NOT happy.

John Cunningham said...

the risk of confiscation would seem to favor holding wealth in items such as weapons, ammo, tools, long term storage food, land, seeds, and the like.

w said...

And how long before they also confiscate the non-money stuff we hoard (guns, ammo, food, etc)?

Clayton Cramer said...

Confiscating money in accounts has effectively no transaction costs; it is just entries in databases, and banks, brokerages, and other financial institutions are not going to fight back against the national government.

Confiscating tangible goods has substantial transaction costs: someone has to go out with trucks and grab them. More than a few people will surrender their ammunition, one round at a time. Not many. Probably only about 0.1% of the population would be that foolish. But that would be 317,000 violently opposed raids. Even with overwhelmingly force being used, by the end of the second week, large numbers of law enforcement agents would be dead, wounded, suffering "blue flu," or actively fighting the government.

Karhu said...

BTW, I didn't get the impression that these are proposals. These guys are the authors of the great This Time Is Different: Eight Centuries of Financial Folly, and I took the excerpts of their IMF report to be their predictions of what's going to happen.

It's certainly the case many major counties including the US are firmly in another era of "fiancial repression"....

Anthony said...

Mauser - how good is the guarantee? Was the pension fully funded? Who actually handles the pension - your employer, or the union? Do you trust them and/or the financial manager they selected to actually get the rates of return they said they would?

City of Detroit workers had a "guaranteed" pension, and are going to get 16c on the dollar because the money just wasn't there.