Monday, March 18, 2013

Pygmalion Shrugged

Cypriot depositors set to "pay" a "surprise tax" on bank holdings (more here) are being offered a curious incentive to keep their cash in Cyprus: equity in future revenues from gas.

As Tyler Cowen says, solve for the general equilibrium.

Take Cyprus as a small-scale experiment. Suppose it works as the political elite predict and they grab the €5.8B they're after, forking out enough IOUs to placate customers. Suppose further that tax-pinched sovereignties elsewhere discover this gravid cash heifer and heave-to a-milkin'. Would a worldwide confiscation of wealth expose the itchy truth that modern money and banking isn't particularly euvoluntary?

The fiat currencies in use today are popular because they beat the pants off the alternatives. As I've pointed out before, not-unforced barter is for children and the destitute, and truck is a dirty word burned into a cracked shingle under the awning of  BATNA disparity. Gold as currency has been pronounced verboten by diktat, and electronic currencies are still in the "adorable curiosity" stage. Sure, some international firm might be able to credibly issue good private scrip that would run parallel to national currencies, but really, without the good faith of government backing, it's awfully hard to imagine a big issuer not facing a substantial expropriation threat, even in relatively free zones like the UK or the US. The collapse of Bretton-Woods (and heck, the hijinks of John Law and Louis XIV while we're at it) should be all the alarum bells we need to mind what happens when political elites catch whiff of what they can do with all the guns at their disposal.

The alternatives to banking often offend. If you want capital-intensive production (and yes, this includes modern agriculture, which is pretty much the only way possible to feed a planet of seven billion people), you can't get there with money stuffed into a mattress. If you want commercial, home, student, auto, or whatever loans, you're limited to a healthy banking sector, some sort of public option, or subterranean lending.

Western governments have sworn constituents a galaxy of promises that may be challenging to keep. Judging by the tone of the political kayfabe, they seem to be fond of making many more such promises. As Cyprus is busy showing us, the risk of expropriation may be quite severe indeed. Banking is not euvoluntary, which is exactly why politicians must take great pains to avoid threatening deposits: the consequences are too awful to tolerate.

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Do you have suggestions on where we could find more examples of this phenomenon?