Tuesday, 19 March 2013

Your Money Isn't Safe Anymore

_Jeffrey TuckerGuest post by Jeffrey Tucker

The euro elites don't call it theft or robbery or even a tax, much less an outright default by the banks of Cyprus. They are calling it a "stability levy," a plan that could lead not to stability, but a domino-style collapse of the banking system in Europe.

True to the nature of government propaganda, the Cypriot head of state, Nicos Anastasiades, says this "stability levy" is necessary to forestall "a complete collapse of the banking sector." It's the same kind of language we heard in the fall of 2008 -- an intimidation tactic used to shove through TARP and unending bailouts.

More likely, the plan to tax all Cyprian bank deposits 6.75-10% will trigger one. Or maybe just the talk of it already has. We can't know for sure, because the government of Cyprus has declared a banking "holiday," a term that means that the robbers take a vacation from being held accountable for their actions.

What this plan signals is pretty clear: Your money is not in the bank. If you get there fast and withdraw what you can, you might survive. If you delay, all bets are off. That means an old-fashioned bank run -- the ultimate check on the soundness of banking.

Another way to look at it: It's a game of musical chairs, and the music has stopped. The purpose of the "holiday" is to tase people so they can't find their chair.

The tax is part of a $10 billion bailout arranged by Eurozone countries together with the IMF. So far during the long, slow, relentless, meltdown of the world's banking systems over the last few decades, the idea of outright confiscation has been something that governments have generally tried to avoid.

It turns out that people don't like to be robbed. They normally like to think that the money they put in the bank is accessible to them. So when Anastasiades demanded this, he got massive pushback from legislators and depositors.

Meanwhile, people were scrambling to get money from ATMs and trying to wire money out to safer havens. That's when the rude surprise came: Their accounts were locked and transfers have been stopped. ATMs are marked "out of order."

As I write, legislators have backed off the proposal to loot absolutely everyone equally, but instead will focus the most intense effects of the heist on only the very rich. [News this morning that the the Cyprus government now plans a vote to change the “levy” to 3% for deposits below 100,000 euros and 12.5% for above that sum.  And counting.]  This might make it more palatable for lawmakers, but no more so for the population at large. Politicians can promise all they want that this is a "one-off levy," but anyone who believes that is an utter fool. Citizens can be pretty dopey in believing political promises in general, but when it comes to their own money in their banks, their gullibility certainly has its limits.

Geographically-challenged Americans might be forgiven for having spent most of their weekend ignoring news out of Cyprus, a country they last heard about when studying ancient civilizations in high school. A friend of mine from Cyprus who lives in the U.S. gave up trying to explain where he is from long ago and is now satisfied to tell people he is from Greece.

Actually, Cyprus is one of the world's most prosperous countries, owing mainly to its status as a world financial hub. As Doug French put it to me, "This is a bank with a country attached."

Its population is mostly tourists and fluctuates based on season. But its prosperity for the last 20 years is due mostly to the deposits it receives from all over the region, especially from Russia. This is why Vladimir Putin has become involved in the current controversy, denouncing it as unfair and unwise.

The trouble is that Cyprus has to raise the money. It has to come from somewhere. The core problem is that this proposal, especially the idea of taxing deposits that fall below the deposit insurance ceiling, undermines that elusive but absolutely essential thing called confidence.

If people no longer believe in the system and run on the banks, the whole thing can unravel very quickly. In most countries today, there is depository insurance that provides the illusion that people's deposits are safe. The remarkable thing about the "security levy" is that it amounts to an open announcement that there is no assurance that the money must come from somewhere, so they might as well get from in the most obvious place.

There was a time when banks operated like normal businesses, performing a service in exchange for payment, while clearly delineating what part of people's deposits were at risk (and, therefore, paid a premium) and what part were security (and, therefore, a service to be paid for). But central banking and fiat paper money have confused the issue to the advantage of the financial system, but to the disadvantage of depositors, especially when faced with a crisis moment such as this.

Still, it is an unprecedented move, one that harkens back to the days of the early New Deal, when FDR closed the banks, suspended the gold standard, and outright changed the definition of the dollar in order to bail out the banking system. This kind of thing is not supposed to happen these days. The bankers are supposed to be wiser and more sophisticated, using fancy tools of monetary policy to continually shore up confidence in the system.

The suggestion that the banking system just outright steal people's money -- even if it doesn't end up getting through the legislature -- has dramatically changed the psychology of banking throughout the Eurozone. Over the coming weeks, Spaniards, Italians, Russians, and many others throughout the region are going to be quietly (or maybe not so quietly) testing the same, pulling deposits and finding other ways to secure their funds.

The word central bankers everywhere dread: contagion. It means the spreading of truth and actions based on that truth. Might Cyprus be the new bubble that breaks the world? It's a good time to revisit our friend Garet Garrett's 1932 classic that retains all of its explanatory power: A Bubble That Broke the World.

For banking regulators and politicians, this really amounts to an epic fail, even from their own point of view. They never want the veneer of stability and soundness stripped away. They want a population of depositors blissfully unaware of the vulnerability of the monetary and financial systems.

You might ask, "If you are so smart, what do you suggest?" That's easy: default and bankruptcy.

Contrary to the conventional wisdom, the Lehman Brothers case is not a model to avoid, but one to follow. Let the Cypriot banks that are under threat die a quick death, even if that means not paying those who believe they are owed. Under the conditions, there is accountability and there are permanent lessons learned.

This approach -- yes, it is far-flung and stands zero chance of actually happening -- might actually restore sound banking practices. Just imagine a world in which banks operate like honest, solvent, self-reliant businesses, not lying, not teetering on the brink, not depending on government and politicians and central authorities. Seems like a dream, but we can get there through a simple step: Allow the failure to happen.

But might that approach trigger a Euro-wide meltdown? Maybe. That seems to be something that is going to happen with or without this "one-time stability levy."

Meanwhile, the banks are closed. No one in the Eurozone is sleeping well at night. And it's going to be a wild week.

The Euro crisis alone might account for why Bitcoin has moved from $15 to $48 in three months. Is it possible that Russia's largest depositors saw this coming and have been slowly moving money out to the digital safe haven? We'll never know, because the transactions are anonymous (thank goodness). But ask yourself this question: Where would you rather have your money? In Bitcoin, or insured deposits in Cyprus? *

Sincerely,
Jeffrey Tucker

* Or gold.

FURTHER READING:

15 comments:

  1. I've been reading on and tracking the Bitcoin currency for over a year now.

    Exciting concept, dare I say, the future. Although Bitcoins have been cited in one FBI search/bribery case now, so interesting to see if it can remain out of the government clutches, or rather, what governments will try to do to control it.

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  2. Gold is no safe havean- Govts can & do outlaw its use.

    IvanK

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  3. @IvanK: You said, "Gold is no safe haven - govts can & do outlaw its use."

    And have!

    But still, I'd argue, the safest haven.

    @Mark: Bitcoin? I agree with Keith W., who says in that article I linked above:
    " it has several features that uniquely suit it for certain markets, [but] it is an irredeemable currency, but not money... If a currency is subject to Internet availability or other technological considerations, it simply is not money. It may still be useful for enabling commerce that would otherwise not be feasible—this is not an attack on Bitcoin as such. But (at least) one key characteristic of money is missing. Money must be beyond question by everyone and at all times. By nature, gold never becomes “unavailable” (though one could [have it stolen or] entrust it to an institution that suffers from unavailability of course)."

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  4. "Gold is no safe havean- Govts can & do outlaw its use"

    Which is why some of us do "midnight gardening". Once its use is again permitted, we can dig it up, and it still weighs the same.

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  5. Peter, yes agree with the quotation, but as an cyber currency it has a huge use (and philosophic value, quite apart from anything else).

    ReplyDelete
  6. Um, re Bitcoin, this is interesting though:

    https://bitcointalk.org/index.php?topic=154518.msg1638361#msg1638361

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  7. Peter I am going to have to disagree with you on this one. Many things have functioned as money, including tobacco leaves, big rocks, bonds, stocks, etc. Today most money is already just a digital entry – it is not even backed by paper. Money in a free market is anything that functions as a medium of exchange and a store of value.

    If you combine this (Cyprus) with the new FACTA law from the US that allows the US government to seize 30% of every bank transaction of US citizens in foreign bank accounts, you have the end of the banking system. People will put their “money” under their mattress. I know people who no longer have bank accounts because of these and similar actions by governments.

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  8. "Let the Cypriot banks that are under threat die a quick death..."

    I agree.

    I left a comment on another blog saying that capitalism is a "tool", and like any tool it can be used well or very poorly.
    The bailing-out of these banks is an example of it being used poorly.

    So - when the world financial system turns to custard, my view is "don't blame capitalism - it's merely the vehicle. Blame the idiot *drivers* - the leaders of the US and European countries."

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  9. I have a couple of questions for this blog - I'm sure these will spark some lively discussion... :)

    1 - Would it be possible for New Zealand to "go it alone" and declare our currency as being "backed by gold"?

    2 - If it *is* possible, would it be a "good move"?

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  10. The Reserve Bank of NZ does not hold enough gold to come close to be able to back the NZ$ with it.

    There would be significant short term consequences of going out to buy gold to address this (as it would reduce the money supply, increase the value of the NZ$ and eventually reach an equilibrium), the key one being that the NZ$ would skyrocket in value, meaning domestic prices would need to plummet, otherwise exporters will go out of business unless they also drop their prices.

    It would be nice if some politicians actually even discussed the issue, instead Russel Norman wants to monetise public debt, but he's a retard.

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  11. Silver is better.

    Amit

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  12. Libertyscott

    Yes there would be sort term pain. yes some sectors would feel the pinch. So what. The reallocation of resource must occur. It should be allowed to occur.

    Also know this, the ONLY reason to export is to import.

    Amit Cim

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  13. @Dale: I'm going to have to disagree with you by agreeing that many things have functioned as money, for the very reason that Keith states in that quote above; because they were valued by everyone at all times they were used.

    The unspoken footnote to this is that tobacco leaves, big rocks etc, were valued not because they were declared by govt to be legal tender, but because they were already universally valued. (Read Carl Menger on 'The Origins of Money.')

    The foundation of our fiat currency however, the currency that is only a digital entry, is backed only by the govts law that says you must accept this is legal tender, and is valued only so long as there is universal respect for that law and that fiat currency--both of which govts are doing their best to diminish, if not overturn.

    That said, you are 100% correct that "this (Cyprus) with the new FACTA law from the US that allows the US government to seize 30% of every bank transaction of US citizens in foreign bank accounts, you have the end of the banking system."

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  14. Bitcoin, say, are you really that confident of internet security ? Bitcoin has been hacked before and it will happen again.

    What will you do when it isn't some government just printing money, but anonymous or some otrher such group "bitcoining" it.

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  15. Hi again all - thanks for your comments on my musing about a gold-backed NZ dollar.
    Very informative!

    ReplyDelete

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