The world has been slipping further into economic illiteracy over the past five years, with seemingly no country immune. From the United States, ostensibly, still a bastion of classical liberal orthodoxy, we have seen laws enacted (and upheld by the judiciary!) that allow government to force consumers to purchase a specific product (in this case, health insurance). From the US and Europe, we also have a continued descent into monetary policy madness, with QE Infinity from the Federal Reserve promising “Quantitative Easing” until there is a change in inflation or unemployment, and the European Central Bank (ECB) promising to defend the Euro, inflation be damned.

Zdjęcie zamieszczone przez Andrew Bossi w serwisie Flickr. Licencja: Creative Commons - Attribution-ShareAlike License.

To be fair, these economic deviations and infringements on liberty aren’t really new or innovative: governments have always believed they knew what was best for us (and could compel people to do anything), while the Keynesian cult has always been worshipped at the altar of monetary policy as the panacea for the world’s ills. Indeed, these seem to be more of the same economic policies that have always emanated from the left and the disaffected, the belief that prosperity is a lever that originates in the office of the head of government.

However, the world may have hit a turning point with the ongoing Cyprus debacle, one that shows that the world’s economic compass may be irreparably broken. While Keynesians and the Krugmans and Stiglitzes of the world may warn about the dangers of “hoarding,” very few serious economists (and no Austrians) would argue that saving is an activity that government should be actively discouraging. Even in Keynesian formulations of Gross Domestic Product, first-year economics students are taught that savings equal investment, an accounting identity that cannot be challenged.

Cyprus has changed it all. Reaching a bailout deal with the ECB, Cyprus has agreed to levy a tax on deposits above 100,000 euro to pay for portions of bailout, basically blaming depositors for entering a financial system that then “misbehaved.” The actions of the Cypriot government, in concert with the European Central Bank, seem to have broken the reality of the desirability of savings and elevated the survival of fractional banking (and its child, the Euro) to a level higher than mere economic growth. Such inversion states that money isn’t a means of exchange, it IS exchange, and it must be protected at all costs… even at the cost of real economy, distorted incentives, and a tax upon the prudent.

How bad is this action? The breach in economic policy has even acted as the canary in the coal mine: the Russian government has objected strenuously to the action (even as it has supported the bailout). Never mind the fact that Russia is worried about the action because it is Russian interests (and well-connected Russians) who will be hurt by these policies, nor the fact that much of the Russian money parked in Cyprus is due to the bureaucratic nightmare that is Russia. These two points do not matter, because Russia is entirely correct in protesting this confiscation. And when Russia is exhibiting a better grasp of economics than you are, it is time to worry.

The question becomes then, what next? What depths will policy-makers now plumb in the re-inventing of economics? The usual suspects have already rallied behind the ECB’s bailout, with Krugman saying (predictably) that the Cyprus action was necessary to close loopholes in the still-weak global financial regulatory apparatus. Indeed, many are taking to the ramparts to assert that it was Cyprus’s status as an offshore tax haven that brought these problems upon the country, and thus it needed to be reined in. Unsavory types will be attracted to tax havens; to paraphrase a common Russian saying, why should we save the guilty? Why would they be arrested if they weren’t guilty?

The lack of reaction by the markets has been the real headline, though. Maybe they’ve been beaten down by the escalating lunacy of the past six years, and it will take a major catastrophe to shock them out of their complacency. Or maybe, as the world descends into a cozy corporatist stagnation, businesses are the last ones to complain about their strangulation. So long as their competitors do not benefit.

Stay tuned, because when a compass breaks, the first steps may lead you away from the path… but the errors only compound over time. The world is going to get much more lost before it gets found.