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| By Chris Coney |
During the infamous financial crisis in Cyprus back in March 2013, 47.5% of all bank deposits above 100,000 euros were seized.
Those funds were used to shore up the solvency of major financial institutions that were in desperate need of a bailout.
As a result, ordinary, hardworking Cypriot citizens had their savings forcibly invested into weak financial institutions without their consent.
I often use this historical event to highlight the benefits of self-custody, a feature native to holding crypto assets in your own wallet.
But I have a feeling people living in the Group of Seven countries don’t feel like this example applies to them.
I’m about to shatter that illusion.
Whether you’re aware of it or not, the forcible investment of your savings has happened dozens of times. It’s happened to you, and it’s happened to me. And it’s so sneaky that it’s happened without our ever noticing or seeing a change in the balance of our savings accounts.
I’m talking about when the central bank in your country prints money to buy government bonds.
To understand how this works, think of a government like a business. Its citizens are the customers, and it sells public services. And by charging taxes, the government receives money for its services.
Like any business, a government can borrow money and agree to pay interest on it. Ideally, most businesses — and governments — want to invest that money in a way that generates enough growth to pay back the loan, plus interest and some profit left over.
But before borrowing any money, it needs to find someone to loan it out. And most investors first determine the level of confidence they have in the borrower before lending money to anyone.
Investors can do this by assessing the competence of the borrower, their organizational structure, track record, historical revenues, spending patterns, accrued debt and their plans for the borrowed money.
In a situation where no active retail investors have the confidence in an organization to loan them that money, the organization can seek alternative funding.
It could, for example, borrow money from a financial institution like a pension fund — an organization that’s been entrusted with money to be invested on behalf of passive investors.
So, while those individuals may not want to invest their money in this way, the pension fund may still do so.
But this isn’t the forcible investment that I am talking about.
What can a borrower do if all the various financial institutions also lack confidence in them and turn away their loan request?
For a normal business, it would just have to go without implementing its growth plan.
But we’re talking about governments here. They already have astronomical amounts of debt and enormous interest payments to make.
And that existing debt is so huge that governments need to keep borrowing just to pay interest.
This is the situation almost every country is in now.
Retail investors and institutions have woken up to the fact that the creditworthiness of their governments has eroded to such a degree that no one is willing to lend them any more money.
Governments are not like any run-of-the-mill business, though. They can’t allow themselves to go bankrupt because they’re responsible for managing an entire country.
And due to the size and scope that governments have grown to, a complete shutdown would be catastrophic for most societies.
Thus, they rely on the central bank of their nation to print new money and lend it to them.
The label “government bonds” is a subtle attempt to disguise the fact that in actuality, they’re just government loans.
But the laws of economics tell us that when the supply of something increases, then the existing stock of that thing becomes less scarce and therefore less valuable in relation to everything else.
Take the Bank of England, for instance. Here’s a quote pulled directly from the BoE website: “Between 2009 and 2021, we bought bought £895 billion worth of bonds through quantitative easing.”
And the BoE isn’t alone. Every central bank has been doing this.
So, when a central bank prints money, there’s a consequence. Namely, printing new money reduces the value of the entire existing stock of that currency.
And that existing stock consists of everyone who has savings in it … which likely includes you.
To sum it up, when your central bank prints money to loan to the government, this is the equivalent of money being forcibly removed from your savings account and used to buy government bonds.
This is without your direct knowledge, consent or desire.
Make no mistake. Our savings are being used to make investments in government bonds that we have otherwise chosen not to make.
And it’s being done in a way that’s not visible to the naked eye.
As far as you’re concerned, the balance in your savings account is the same as it was yesterday.
Except if the central bank just printed a whole new load of money and put it into government bonds, each $100,000 of your savings may now be worth $99,000.
The other $1,000 would have been forcibly put into an (arguably bad) investment without your permission.
So, the next time you read about the Cypriot financial crisis or the confiscation of wealth in some distant developing country, remember that this phenomenon is closer to home than you think.
I hold this to be a fundamental flaw in the very structure of the traditional financial system.
I don’t believe free markets can function if there’s a special agent in the system with the exclusive ability to sweep funds from everyone else's wallet and deploy them as they see fit.
The whole reason why free markets are the most efficient mechanism available is they’re massively decentralized decision-making systems.
Bitcoin (BTC, Tech/Adoption Grade “A-”) offers all 8 billion people in the world the opportunity to save money in an asset with a fixed supply that can’t be printed, confiscated or forcibly invested.
And decentralized finance offers those same 8 billion people the opportunity to invest their savings in whatever they personally and transparently choose, not some central authority.
But that’s all I’ve got for you today. Let me know your thoughts on how government bonds affect your savings by tweeting @WeissCrypto.
I’ll be back next week with another update, so stay tuned.
Until then,
Chris Coney
