Monday, March 25, 2013

Post-Cyprus Blues: Confusion and an Erosion of Faith

It is far too early to be projecting much from Cyprus except a continued erosion of faith in Eurozone banks and leadership, and by default, the euro as a placeholder of purchasing power.


What do we know now that the Cyprus bank crisis has been resolved? What we know--that the resolution follows basic capitalism 101 guidelines of matching risk and loss, unlike the rejected across-the-board tax on all deposits--is dwarfed by what we don't know, for example:

Does the Cyprus "bail-in" set a precedent for much larger Eurozone banking/debt crises?

Though the Cyprus resolution is being held up by some as a model for all future Eurozone bail-outs, is the situation in Cyprus truly applicable to larger economies?

Is the Cyprus crisis a tipping point that marks a sea-change in perceptions of systemic safety and risk?

Though no one can claim with any certainty to have the answers to these questions, we can seek a coherent context for our inquiries. One way to do this is to have a wide-ranging discussion with a well-informed, knowledgeable commentator: in my case, that person is Alasdair Macleod of GoldMoney.com.

Here is our half-hour conversation in podcast format. (video format is posted below)

Of the many points raised in our discussion, I found these especially relevant to establishing a useful context of the Cyprus crisis:

1. Banks have perfectly legal claims on the money you have voluntarily chosen to deposit. Sovereign nations or multinational organizations like the E.U. may provide insurance on deposits in member banks, but collecting on that promise is not the same as withdrawing your money in a non-crisis situation.

2. Political expediency is often served by changing the rules, either by dictat or by hastily prepared legislation pushed through a legislative body desperate to resolve a crisis in such a way that it retains its own power and autonomy.

3. Cyprus is an offshore financial center designed to attract large deposits from wealthy foreigners (apparently mostly Russians and Britons). In this, it is more like a Caribbean banking center than a large, diverse economy like that of Spain or Italy.

4. The Cyprus banking crisis is fundamentally different from that of Greece. Cyprus is not indebted to foreign banks; its banks are insolvent due to their own mismanagement of loans, assets and risk. The foreign capital is not at risk of a sovereign default; it is at risk of a bank collapse and the seizure of deposits by creditors.

For these two reasons, it may be misleading to project the crisis and resolution in Cyprus onto other quite different financial crises in other quite different economies. The common ground may be a rising fear of capital controls and the search for safe havens that won't implode or change the rules overnight.

5. Loss of faith in one's banks, government and currency may play out in several ways. Those depositing cash in Cypriot banks were very likely hedging the perceived risk of holding that cash in local currencies and local banks.

The sudden emergence of risk in what was perceived to be a safe haven will likely spark interest in non-banking safe havens, for example, precious metals, and what correspondent Mark G. calls the Glass Jar Bank, which he observes is still a popular alternative in Eastern Europe to entrusting one's cash to banks.

6. A lack of alternative investments leads to asset bubbles in whatever asset is perceived as a safe haven. Households in China, for example, save a prodigious amount of their earnings, but this is not just thrift: the social safety net is rudimentary in China and cash is the only safeguard available.

Since the stock market is rightly perceived as a rigged gambling den, the vast majority of Chinese households choose to invest their cash in real estate, as this is about the only alternative to a savings account available to non-Elite households.

Alasdair noted that the Chinese government has encouraged its citizenry to buy gold, and I noted that the government is well aware that the real estate bubble--inflated by housing being the only available place to park savings other than low-yield savings accounts--poses a great hazard to the nation's financial stability.

7. As faith in the Eurozone's banks, leadership and currency erodes, the U.S. dollar will gain value as a mathematical function of the dollar index. Add in the devaluing yen and the dollar will rise significantly against the other major currencies.

8. There is a much larger geopolitical game being played in Cyprus. Despite rumors of Russian participation, the Status Quo remains firmly in place: the Troika managed the banking crisis, Great Britain retains its naval base and the West retains access to any offshore gas/oil that might be recoverable off Cyprus.

Here is a precis of geopolitical issues revolving around Cyprus: Trouble in the Eastern Mediterranean Sea: The Coming Dash for Gas (Foreign Affairs).

What can we conclude about the longer term consequences of the Cyprus banking crisis? In my view, the present confusion is legitimate: it is far too early to be projecting much from Cyprus except a continued erosion of faith in Eurozone banks and leadership, and by default, the euro as a placeholder of purchasing power.

Alasdair and I discuss a variety of other topics as well, including the Keynesian endgame playing out in Japan: Alasdair Macleod and CHS on Cyprus, Russia, the US dollar, China and more (33 min. YouTube version)

For more on the the eurozone credit crisis by Alasdair, please read Europe is Drowning Under Too Much Government (PeakProsperity.com)

For more on why the U.S. dollar will strengthen by CHS, please read What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012) 



Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

Kindle edition: $9.95       print edition: $24 on Amazon.com
To receive a 20% discount on the print edition: $19.20 (retail $24), follow the link, open a Createspace account and enter discount code SJRGPLAB. (This is the only way I can offer a discount.)



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