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The Fed Has Already Imposed A "Cyprus Tax" On U.S. Savers

Tyler Durden's picture




 

Submitted by Lance Roberts of Street Talk Live blog,

Over the course of the last few days I have been swamped with media calls to discuss the "deposit tax" on Cyprus account holders and the potential impact on global financial markets and, more importantly, the possibility of such an event occurring domestically.  (See recent Fox Business Interview)  So far, Cyprus has not been able to pass such a direct tax against depositors and has gone to Russia for a helping hand.  However, the question of whether such an event could happen in the U.S. is a much more interesting point of discussion.

While I find it doubtful, but not totally improbable, that a direct deposit tax would be instituted by domestic banks - the issue of the Fed's monetary policies, particularly since the last recession, has had a significant impact on "savers."  As we have discussed in the past individuals are not "investors" but rather "savers."  Therefore, in planning for retirement, of which there is a very finite and generally short time frame within which to achieve that objective, individuals must not only have a return ON their principal, to maintain purchasing power parity of those saved dollars, but also the return OF their principal so that it may be reinvested to generate further returns.  One without the other, as has been see witnessed first hand over the last decade, is a losing proposition in the achievement of those retirement goals.  As my friend Doug Short recently showed in his amazing commentary on working age demographics - the age group that should be seeing declines in employment, 65 and older, are actually showing increases.  The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals.

LFPR-Growth-since-1948-25-64-and-65plus-12-MMA

Beginning in 2008 the Federal Reserve began a consistent, and generally unprecedented, series of monetary actions specifically designed to artificially suppress interest rates.  The belief is that by creating an artificially low interest rate environment, and boosting asset prices, that it will in turn spur economic growth and consumption.  The chart below shows the Fed Funds Rate as compared to the 10-year treasury rate since 2007.

Fed-funds-vs-10yr-032013

It is hard to believe that it was just 5 short years ago that the 10-year treasury was yielding above 4%.  That was a return high enough to offset the rate of inflation.  Today, with the Fed keeping overnight lending rates (Fed Funds Rate) at effectively zero - savings accounts are yielding roughly the same.  This has in turn forced "savers", by design, to move money out of the safety of personal savings accounts to chase higher rates of return.  The next chart shows the declined of personal savings rates as interest rates were pushed lower.

Fed-Funds-10yr-Savings-032013

Unfortunately, the drive for higher rates of return has sent individuals buying the most risky of yielding assets driving yields on "junk bonds" to record lows.  This will, as it always has in the past, end badly once again. 

However, the decline in personal savings rates is not solely due to the artificial suppression of interest rates.  The Fed's monetary programs have led to a rising cost of living, particularly in food and energy, which has chipped away at the purchasing power parity of the dollar.

Purchasing-Power-Dollar-CPI-032013

This is not a recent monetary phenomenon but rather one that started more than 30 years ago.  As interest rates have steadily been pushed lower by the Fed - the surge in accumulation of debt to offset the declines in savings and incomes has weakened economic prosperity.  The chart below shows the decline in GDP, interest rates, savings and incomes.  The offset to the declining standard of living has been access to credit.

Debt-Savings-Incomes-GDP-032013

Here is the point of this discussion.  The continued drive by the Fed's monetary policies to artificially suppress interest rates to create a negative interest rate environment for savers is a defacto "tax" on savings as shown in the chart below.

Depositor-Tax-032013

While the individuals in Cyprus have been faced with an outright extraction of capital from their accounts - U.S. savers have had their savings negatively impacted much more surreptitiously.

The problem is that the actions of by the Fed are having the opposite of the intended effect.  If you refer back to the chart above you will see that economic growth, savings, and incomes have all declined as the Fed has continually driven rates lower.   Lower interest rates have not the boon of economic prosperity as advertised.  What history does show is that higher levels of personal savings are necessary to support productive investment which leads to economic growth rates. 

What the manipulation of interest have historically led to is speculative financial bubbles.  Whether it was the "tech bubble", the "credit bubble" or the "housing bubble" the driver of each can be directly linked backed to the Fed's monetary policy actions.  With the Fed now going "all in" with current monetary easing programs it is highly likely that the next asset bubble is already well into formation - the resolution of which is not likely to be any kinder than the past two.

So, can the U.S. potentially have a direct tax on savings?  It's already happened.

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Thu, 03/21/2013 - 19:23 | 3359813 sunaJ
sunaJ's picture

There's nothing quite so off-putting as waking up from a pleasant dream to find that a banker has mounted you and been giving it to you all night.

Thu, 03/21/2013 - 19:27 | 3359827 SolidSnake961
SolidSnake961's picture

it's called "serving" the customer

Thu, 03/21/2013 - 19:35 | 3359847 AlaricBalth
AlaricBalth's picture

And didn't even leave me a Spider-Man towel or a toaster on the dresser.

Thu, 03/21/2013 - 20:33 | 3359969 max2205
max2205's picture

The savings rate is down because they dont have any money to save. 

 

 

The end of ben will be stealing ours savinginterest 

 

I cant believe people aren't in front of the fed protesting tbis gift to banks

 

Fucking dumbasses

Thu, 03/21/2013 - 23:06 | 3360550 imaginalis
imaginalis's picture

Any deposit haircut in any nation should be invalid until an equal haircut has been executed on cayman Islands and other notable offshore havens favored by the global criminal elite.

Fri, 03/22/2013 - 04:19 | 3361062 AldousHuxley
AldousHuxley's picture

the real big boys don't invest in offshore havens. they invest right here in USA.....in the halls of congress there are men who take your money and multiply it more than any other assets.

Thu, 03/21/2013 - 19:45 | 3359859 Midas
Midas's picture

I was surprised to find that article getting some play on finance.yahoo.  They are normally Jim Cramer-like cheerleaders.

Thu, 03/21/2013 - 19:46 | 3359862 ziggy59
ziggy59's picture

Its called rape

Fri, 03/22/2013 - 07:04 | 3361203 King_of_simpletons
King_of_simpletons's picture

Gang-rape.

DC + Wall Street + Media.

Thu, 03/21/2013 - 19:57 | 3359882 Tinky
Tinky's picture

Reminds me of my favorite Will Ferell quote (a tweet, actually):

"I hate it when I forget to turn my swag off at night and I wake up covered in bitches"

 

Thu, 03/21/2013 - 19:24 | 3359819 Croesus
Croesus's picture

FUCK YOU BERNANKE!

Thu, 03/21/2013 - 19:26 | 3359822 Debeachesand Je...
Debeachesand Jerseyshores's picture

And now the bad news.

Thu, 03/21/2013 - 19:26 | 3359825 tony bonn
tony bonn's picture

"...So, can the U.S. potentially have a direct tax on savings? It's already happened...."

damned right it has but the theft started in 1913 when the rockefeller nazis started deforming the currency and manipulating weights and measures which benefitted them but fucked everyone else....judgment day is going to be a real bitch for satan's little helpers....

Thu, 03/21/2013 - 20:16 | 3359935 dick cheneys ghost
dick cheneys ghost's picture

I think you forgot to mention the Rothschild Jews.............

Thu, 03/21/2013 - 22:05 | 3360325 XitSam
XitSam's picture

That's Francis' job.

Thu, 03/21/2013 - 19:27 | 3359828 HelluvaEngineer
HelluvaEngineer's picture

Americans' minds are too ruined by flouride and vaccinations to understand that they have been had. Plus, they don't have much in the way of savings anyway.

Thu, 03/21/2013 - 19:28 | 3359830 Gunga
Gunga's picture

Starve the beast. Withdraw from financial institutions, support locally ownned shops and stores. Reduce your reliance on the US dollar as a savings vehicle.

Thu, 03/21/2013 - 19:31 | 3359831 Racer
Racer's picture

And then they tax you again on any Inflationary er Capital gain

Banksters, they are robbers and thieves call them what they are, aided by bribed politicians,

We the People should punish them for their wrongdoings against us

Thu, 03/21/2013 - 19:30 | 3359835 ebworthen
ebworthen's picture

Yes, ZIRP has acted as an indirect and invisible tax on savings.

Bernanke is, however, prepared to use a direct levy on bank deposits as a policy tool.

To the average person, this will be a visible confiscation on already taxed savings.

This is the FED's Ace in the hole, a 10% "levy" (theft) of every penny in every kind of account (checking, savings, IRA, 401K, etc.).

It will be pulled out and used as an "emergency financial system stabilization measure" with promises of compenstaion in the future.

Just wait, it is up his sleeve, and if you didn't see his poker face in the press conference yesterday look again.

Thu, 03/21/2013 - 21:37 | 3360170 Son of Loki
Son of Loki's picture

True, Americans have already lost 30-40% of their purchasing power (at least) since 2008. Look at foods that have doubled in price...PMs doubled and some tripled....and so on. Money printing causes inflation which is an 'invisible tax' on the average sheeples who do not protect theri investments.

Thu, 03/21/2013 - 22:08 | 3360335 XitSam
XitSam's picture

If Ben does an explicit savings tax, there won't be enough Federal Reserve Police to protect him. Not from me mind you, I live on the other coast and keep a minimal amount in a checking account.

Fri, 03/22/2013 - 16:17 | 3363582 dizzyfingers
dizzyfingers's picture

Close bank accounts. Purchase little; pay cash. Destroy credit cards. Drive little. Use utilities little. Ditch land-line, use throw away cell phone. Shut off computer and tv. Starve the beast.

Thu, 03/21/2013 - 19:30 | 3359836 Seasmoke
Seasmoke's picture

The senator from WV should be very nervous.

Thu, 03/21/2013 - 19:38 | 3359844 PUD
PUD's picture

That is not true. While "savers" are not reaping windfall interest income, they are also privy to the lowest mortgage rates ever. There is no such thing as a correct interest rate...there are always two sides to the equation. If the lender gets less the borrower saves more. Also...you cannot increase wealth of a nation by paying high rates of interest to 'savers'...debt compounds in a money = debt system. Everyone is the poorer when ever greater amounts of fiat are created via debt which include the debt money that needs to be created to satisfy the interest component on existing debt. The idea that low interest rates (caused by the fed or marketplace) are a detriment is false...the other party is an equal winner. 

Of course this no way endorses the terminal fraud system of money=debt, fractional reserve and credit for consumption model we live under...this model has stage 4 cancer and there is no stage 5

Perhaps the author would like to describe the nation and the status of savers and borrowers if rates were 20%?  And if that benefits "savers' so much that it is desirable how about 30%

There are no free lunches in a debt =money system...it is a mathematically doomed system no matter what interest rates are

Thu, 03/21/2013 - 19:43 | 3359858 JR
JR's picture

There are winners and losers; the winners have all the money, and the losers lost their money. You know, it’s Fed policy: robbing poor Peter to pay rich Paul.

That’s simple enough but what’s really hard to understand is where you came from.

Thu, 03/21/2013 - 21:00 | 3360056 espirit
espirit's picture

Quite alot of "money" was lost in boating accidents, currencies - not so much.

Thu, 03/21/2013 - 19:45 | 3359860 W74
W74's picture

Interest rates at 20% would benefit savers.  Why?  Because savers would get a return on their deposits (say10-15%) and would be able to pay cash for the things they've saved up for, and thus no interest anyway.  Prices would go down in nominal terms (especially for things like cars and houses) because without the easy money there's incentive for buyers and sellers to meet at a lower purchasing price.

Thu, 03/21/2013 - 19:48 | 3359865 PUD
PUD's picture

Totally wrong. Someone has to pay that interest it does not grow on trees. The receiver rejoices, the payor does not and has less wealth.

You clearly do not understand how money is created in a debt = money system

All interest has to be created too by the same mechanism...more debt!

It is a foolish notion to believe that it isn't a zero sum game

Thu, 03/21/2013 - 20:04 | 3359903 SHRAGS
SHRAGS's picture

So the only winning solution is to play in "their" debt game - false dichotomy.  Ask mortgage holders how they feel about "winning" on lower interest rates, while seeing a >30% decline in house prices, negative equity and a trapped debt serf.

Thu, 03/21/2013 - 20:06 | 3359912 razorthin
razorthin's picture

Oh I think he understands plenty.  What he is saying is FUCK THEM!  As am I.

Thu, 03/21/2013 - 20:11 | 3359924 besnook
besnook's picture

zero sum is a closed system like forex trading). in fractional reserve banking the bank only loses when it cannot leverage deposits in the form of loans(creating new money underlying real assets. not zero sum). when there is a dearth of loans at 20% then rates are lowered until demand picks up and savers receive lower rates to reflect the lower demand for loans(lower interest rates). this time the mechanism is broken. savers are receiving lower rates on savings not because of lower demand for loans but because the banks need to loan money to balance bad debt on their books.

what has been created is a negative feed back loop instead of a positive feed back loop. a positive feedback loop just slows down the cycle. a negative feed back loop can only be stopped with destruction and a reset.

 

Thu, 03/21/2013 - 20:25 | 3359954 Bastiat
Bastiat's picture

 

New money is created to pay interest with more credit.  That's how we got here.

It is a zero sum game in terms of value--all savers get diluted to the benefit of borrowers to the extent that the inflation exceeds the nominal interest rate. 

Thu, 03/21/2013 - 19:49 | 3359866 Lordflin
Lordflin's picture

Banks borrow at zero percent, turn right around and pump the proceeds back into bonds... it is as direct a transfer of wealth as deposit confiscation. The more interesting question is why come out into the light of day where even the most out of touch citizen can witness the theft. I have read allot of theories on that one... my vote is hubris, avarice and stupidity...

Thu, 03/21/2013 - 19:36 | 3359850 JR
JR's picture

A very significant and important article, a long time coming.

In recent years there has been general agreement that wage and price controls not only do not work, they are detrimental to economic prosperity. But yet, the control of interest rates is simply price control. It is price fixing at its most detrimental level. It is picking winners and losers in the economy by the Fed and eliminating all supply and demand functions of the price of money.

In this case, the losers are Americans who have attempted to store the fruits of their labors for use at the most opportune time. The winners are the bankers who get to steal these savings at discount and even zero interest rate levels. And, of course, other winners are non-producers who get filtered-down stimulus, originally part of the savers’ bank accounts, gratis the U.S. Congress and Obama.

Thu, 03/21/2013 - 19:36 | 3359851 nmewn
nmewn's picture

"The continued drive by the Fed's monetary policies to artificially suppress interest rates to create a negative interest rate environment for savers is a defacto "tax" on savings."

Yep. Bernanke shot his wad straight into a debt trap.

And she's clamped down, you ain't goin nowhere big boy ;-)

Thu, 03/21/2013 - 19:43 | 3359857 falak pema
falak pema's picture

wealth tax on bank deposit undoes the Qe inflation route. Its one or the other...just saying, the Merkel put if applied to US would obliterate the Qe play of Ben and also the Zirp easy money.

It would bring austerity bigtime to US, as its taxing the rich not socialising the poor in debt and currency debasement.

Thu, 03/21/2013 - 19:47 | 3359863 notquantumdum
notquantumdum's picture

In addition, these effects have all apparently given a huge pass to the politicians for enacting some of the worst economic policies ever attempted, if worst is defined by making it less affordable to have an employee in the US.

It's hard to believe that doesn't exacerbate these problems.

What could be worse for the common people?

Thu, 03/21/2013 - 20:12 | 3359925 notquantumdum
notquantumdum's picture

Ever wonder why the "recoveries" keep getting worse?  ('If you look back far enough in history.)

Thu, 03/21/2013 - 19:55 | 3359877 besnook
besnook's picture

this is so perverse that you actually get a return on borrowing because borrowing rates are lower than the real inflation rate. so if you have a 100000 mortgage at 4% and the inflation rate is 6% or higher(shadow stats) then, given the normal borrowing rate of inflation plus 4%+- , you are receiving a benefit of a discount on your loan totalling 6% of the amount of the loan. in other words, in simple interest over a year's time you are only paying 4000 dollars in interest on the principle when you should be paying 10000 dollars in normal times, a gain of 6000 nominal dollars in the form of a discount to reality. that includes a real discount of 2% above what you are actually paying in interest because the real value of the loan is losing 6% of it's value annually in inflation adjusted dollars. in other words inflation is paying off 2% of your principle annually above what you are paying with your 4% mortgage. the banks are losing money on every loan.

Thu, 03/21/2013 - 19:58 | 3359885 notquantumdum
notquantumdum's picture

Damn, right.

I just refied my home mort to an even longer duration fixed rate loan.

I figure that will be a great inflation hedge should we need such hedges.

Thu, 03/21/2013 - 20:01 | 3359894 notquantumdum
notquantumdum's picture

And, since so much of the home mortgage market is backed indirectly or directly by government sponsered (and now owned) entities like fannie and freddy, I can probably thank all of you taxpayers in the US out there who have taken this inflation risk off of my personal books!

Thu, 03/21/2013 - 20:05 | 3359908 notquantumdum
notquantumdum's picture

or, is it sponseared?

Thu, 03/21/2013 - 21:06 | 3360067 skipjack
skipjack's picture

Yup, and when the banksters foreclose on your sorry ass you'll regret that mortgage.  How do you like overpaying for that crap house - you'd pay a lot less for that property if the interest rates were a lot higher, and youd have a lot lower basis for property taxes.  Just saying, you guys clearly don't understand the credit/cost issues.  But be my guest - overpay for your house, that's a good little debt slave...

Thu, 03/21/2013 - 22:10 | 3360342 chubbar
chubbar's picture

Nope, sorry Skipjack. That is what happens when the bankers interject some deflation. In this environment the gov't will not have the option of raising interest rates, period. Therefore, the currency continually depreciates without a correseponding rise in rates. Nice try though!

Thu, 03/21/2013 - 22:40 | 3360463 notquantumdum
notquantumdum's picture

They can't foreclose me, if I can pay it off.

'Just don't ever borrow too much.

Thu, 03/21/2013 - 22:43 | 3360473 notquantumdum
notquantumdum's picture

. . . And, I bought a foreclosure, so I doubt I overpaid by too much.

Fri, 03/22/2013 - 10:44 | 3362004 Overfed
Overfed's picture

Sheeit. My mortgage payment is easily $250/mo. less than what I would be paying to rent a similar place. Nobody owns anything as long as the fux in charge can hold it hostage via property taxes.

Fri, 03/22/2013 - 16:09 | 3363562 dizzyfingers
dizzyfingers's picture

Overfed: Real estate is a direct hand into your pocket for any taxing body to take your money. If you rent you'll still pay r.e. taxes.

Thu, 03/21/2013 - 23:23 | 3360613 notquantumdum
notquantumdum's picture

And, I don't really support this policy, of the gov't subsidizing long-term interest rates for home-owners with a mortgage, but I'm going to try to play by the rules, whatever they are, once they are determined.

Shouldn't we change the rules, if this stuff doesn't work well over time?  (And not punish the players who try to comply but whom are not necessarilly politically favored?)

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