The Gods of the Copybook Headings are in Cyprus

In his 1919 poem, The Gods of the Copybook Headings, Rudyard Kipling compares the truths of the real world ("the Gods of the Copybook Headings") with the promises of social progressives ("the Gods of the Market Place"), and he concludes that nations which follow the false promises of the social progressives eventually rediscover reality, often when it is too late. (Click here to watch talk-show host Glenn Beck read the poem.)

In his April 2 column (Today, Cyprus, Tomorrow...) former Reagan speech writer and presidential candidate Pat Buchanan sees the Gods of the Copybook Headings at work in Cyprus today. He argues that those investors who loaned their money to Cypriot banks were ignoring reality, writing:

From Asia to Europe, people concerned about the safety of their money are looking at Cyprus, with many surely saying, "There, but for the grace of God, go I!" And they likely hear in the anguished cries of Russian, British and Cypriot depositors, who got no warning and failed to get out in time, a fire bell in the night for themselves....

If Kipling's Gods of the Copybook Headings, who arrived on Cyprus in March with their terrible swift sword, are back in charge, is this not better than having Western taxpayers forever securing the deposits and investments of the rich and feckless?

Buchanan is correct, but the "terrible swift sword" of the Gods of the Copybook Headings is a two-edged sword. It is not only slashing the savings of investors, it is also slashing away at Cypriot employment:

  • Cyprus used to be an international center for banking. The jobs serving foreign depositors died when Cyprus confiscated 37.5% of deposits exceeding 100,000 euros by converting them into nearly worthless bank equity.
  • Many of Cyprus' businesses are now going bankrupt due to a cash crunch. Not only did they lose 37.5% of their bank deposits of over 100,000 euros, but now they only have limited access to their remaining funds.
  • Cyprus's biggest employer, the government, has kept its wages and employment high. But in return for the low interest 10 billion euro loan that will keep it solvent, the Cypriot government will have to move its budget toward balance.

Meanwhile, Cyprus' underlying problem, its huge trade deficit, is not being addressed. From 1995 through 2012 Cyprus averaged a current account deficit (trade deficit) of nearly six percent of GDP. Borrowing that much money from abroad to buy imports makes for huge international vulnerabilities. If the problem goes on too long, the choices become stark. Either the lenders do not get repaid, or someone steps in to pay them. In Cyprus, the lenders did not get repaid.

Countries that run trade deficits do not save; they live on borrowing from abroad. The going is good while the foreign loans are flowing in, partly due to real estate bubbles and stock market bubbles. But eventually, they lose credit.  Cyprus has now lost credit.

As a member of the euro zone, Cyprus cannot adjust its currency value, nor can it impose trade restrictions on its major trading partners. Unless natural gas in the Eastern Mediterranean or some other source develops quickly to rescue its balance of payments, Cyprus' balance of trade will be forced toward balance through extremely high unemployment causing a long, painful decline in individual income and wages.

Cyprus will share high trade deficits and high unemployment rates with the other southern European countries of the euro zone. If there ever was an economic folly perpetuated by the Gods of the Market Place, it was the idea that if each country in Europe would give up its own currency, they would all be more prosperous. For a time it seemed to work, but then the bills started coming due.

A number of years ago, Prof. Milton Friedman, one of our [Raymond's] mentors, predicted that the euro could not be sustained. He recognized that a condition of its longevity was that each member had to earn as many euros or as much foreign exchange that could be converted into euros as it spent. Not necessarily every year but the deficit could not go on indefinitely.

With interest rates nearly the same all over Europe, the northern European peoples saved more than the southern European peoples and loaned the southern European peoples money. The northern European countries got trade surpluses and prosperity and the southern European countries lived beyond their means and lost their industries. Countries cannot forever add on debt. Eventually they become bad credit risks - Cyprus and Greece today, Portugal, Spain, Italy and France tomorrow.

Meanwhile, in the United States, the Gods of the Market Place argue that the free movement of savings across borders is good and that tariffs are bad. So we let Asian governments manipulate the exchange rate between their currencies and ours, and we never charge a trade balancing tariff. They buy the dollars that their exporters earn from trade and lend them to us so that we can continue to buy their products -- and they can continue to keep out ours. They get industries; we get debt.

The Gods of the Copybook Headings are in Cyprus now. They will soon travel to other countries of southern Europe. They sent us a warning shot that we did not heed in the 2008 financial crisis.  Like Cyprus, we continue to have a huge and chronic trade deficit. From 1995 through 2012, the U.S. current account deficit averaged 3.7% of GDP. In 2012 it was 3.0%.

Unlike Cyprus, we can print money and we have serendipitously discovered huge sources of natural gas and oil. But unless we reduce our trade deficits, we will become another Cyprus. And when the Gods of the Copybook Headings arrive here, the consequences will be devastating for the free world and the world economy.

The authors maintain a blog at and co-authored the 2008 book, Trading Away Our Future. Dr. Howard Richman teaches economics online. Dr. Jesse Richman is Associate Professor of Political Science at Old Dominion University. Dr. Raymond Richman is a professor emeritus at the U. of Pittsburgh and received his economics doctorate from the U. of Chicago