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Cyprus Seizure to Spread?

The shock waves are still rippling from the bailout of Cyprus and the seizure of high income bank accounts to the tune of 40%. The fear is that idea of simply taking money out of bank accounts in order to shore up banks will become a common-place practice, which undermines peoples' trust and creates panic. That fear is already threatening to become a reality as a senior eurozone official has already announced that savings accounts in Spain, Italy and other European countries could succumb to the same fate as those in Cyprus.

There are two big questions to address: How did Cyprus get to this place and can this happen here in the United States.

As the Heritage Foundation points out, part of the reason why Cyprus has limited options to sure up this crisis is because of its bloated government sector, which has resulted in lack-luster economic growth: “Undermining the country’s prospect for long-term economic dynamism, Cyprus’s government spending has increased noticeably since it joined the EU in 2004 … the public sector has ballooned to over 45 percent of gross domestic product and keeps growing.” In a lesson we could learn in our own country, based on research by the European Central Bank, analyzing over 100 countries’ data: “There is a significant negative effect of the size of government on growth.… Government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).”

Can it happen here? The opinions range from “absolutely not” to “it already is.” Thomas Sowell argues that our government is already engaged in an effort to slowly and steadily steal our wealth by simply printing more money – something which Cyprus cannot do. As Sowell explains, “This new money buys just as much as the money you sacrificed to save for years. More money in circulation, without a corresponding increase in output, means rising prices. Although the numbers in your bank book may remain the same, part of the purchasing power of your money is transferred to the government. Is that really different from what Cyprus has done?” Something to think about.