What Cyprus means

By Jim Thompson
HCP columnist

The Euro zone Central Bank finance members rocked the financial world on Sunday, March 17 in a manner more startling than any prior financial event in my lifetime.

The island of Cyprus needs another bailout. Their misfortunes are largely related to their close economic ties with Greece.

The finance ministers said, fine, as long as you immediately tax all bank accounts on the island to the tune of 10 percent of their holdings. ATM machines were empty within hours.

The Cypriot financial system blocked all electronic transfers of funds. Monday morning, stock markets were down around the world. This is a huge deal.

Now, the cat is out of the bag. If it can happen in Cyprus, it can happen in Greece, Spain and Italy. The Euro risks complete collapse, again. If this situation causes a run on banks around the world, utter chaos will ensue.

Trust is the cornerstone of the modern banking system. When you or I or a company puts money in a bank, we trust it will be there when we want it. If an entity – out of the blue – puts forth loan conditions that require a country to take our money out of our savings accounts, we will put it in a mattress. And economic activity will come to a halt.

Note that this condition is a voluntary one in some respects.

The EU bankers are saying, you want our money? Here are our conditions. Don’t like our conditions, go somewhere else. The problem is, Cyprus has nowhere else to go. They are a deadbeat at this point.

Please note, in this entire article I am not out there with the conspiracy theorists. (The conspiracy theorists’ logic goes something like this: The Catholics just elected a Jesuit Pope. They are linked to the Knights of Malta, an organization with observer status at the United Nations. Malta is a tight banking partner with Cyprus. Hence, the action against Cyprus is a shot over the bow at the new Jesuit Pope.)

Now, I told you I wasn’t a conspiracy theorist.

But ignoring the conspiracy theorists, can what just happened in Cyprus happen in the United States? Absolutely. Will it happen soon?

It's not likely unless a total banking panic engulfs the world – but it is coming if we do not mend our ways.

People who do not understand the financial system, internally to the United States or its links to the rest of the world, think the Federal Reserve can go on printing money indefinitely. This is not and never has been true. It is a fool’s paradise to think this behavior can continue without bounds.

There are only two ways the U.S. federal government can pay its bills.

One of those ways is to print money out of thin air. In the private world, doing this with a company – that is, issuing excessive stock certificates – is called "watering stock" and it is illegal.

The federal government gets by with it for two reasons: (1) they make the rules and (2) markets trust them to make good on their debts.

The second way is to borrow money from discrete large banks around the world, using various financial instruments. This method depends on “making a markets” with private investors.

You cannot make private investors in China or Britain or Germany buy your debt. Hence, the shenanigans of the federal government are really and ultimately affected by non-government financial houses.

You can’t get around it. This is what happened to Cyprus via a circuitous path through the Euro zone financial ministers.

They realized that in order to keep their credibility with the bankers on whom they depend for their own borrowing, they must start demanding more from the borrowers at their door.

Poor Cyprus just happened to be the first victim of this new order.

If we become a deadbeat nation, the world’s bankers will treat us just like they treated Cyprus: You want our money? Here are our conditions.

Ultimately, if we don’t behave ourselves, Congress, the president and the Federal Reserve are powerless. We are perilously close.

The interesting observations now will be to see how the world reacts, separately and collectively. Will markets tank completely and the contagion of bank runs spread like wildfire?

What will we do in the United States, for this issue ultimately boils down to our unfunded federal entitlements programs and unfunded government pensions at all levels? People will become afraid and angry – afraid and angry enough to take to the streets if their pension, retirement or social security checks stop coming.

It will no longer matter that a certain group, sector or entity “was promised something and now we have to give it to them.”

We are talking about chaos far beyond this level. It could become very dangerous.

We can’t wish our ways out of this, folks. The dithering that has gone on in Washington will stop, either in a civilized fashion or an uncivilized fashion.

The delusion we have been living in is over. All we have to do is mark its passing on the calendar. 

Ask Cypriots if they think this is all a fairy tale now.

Jim Thompson, formerly of Marshall, is a graduate of Hillsboro High School and the University of Cincinnati. He resides in Duluth, Ga., following decades of wandering the world, and is a columnist for The Highland County Press.