The Cypriot case is all over the place, in all types of media. However, it is amazing how the following simple facts remain underexposed. It is one thing to look at the news; it is another thing to look at the learning that comes out of the news.
For those who are willing to see, here is what Cyprus is teaching the whole world about money, the debt crisis and gold.
Submitted by Deviant Investor
The following article was written by our friend, “Taki” of GoldSilverWorlds. I have reposted it, with his permission, and added my opinions in red.
GoldSilverWorlds | March 20, 2013
The tragedy in Cyprus continues. Reuters reports today that the island is in an impasse as the initial proposal of past weekend was killed by the Parliament with 100% of the votes. Several alternative plans are being discussed behind the scenes. One of the potential scenarios is the Russians buying up one of the ailing Cypriot banks. Meantime it appears “EU officials voiced frustration but little sympathy for an ambitious but now bust banking system.” (via Reuters).
We wrote over the weekend our conclusion about the Cypriot case: Wakeup Call From Cyprus To The Rest Of The World. It was meant to help people SEE with their own eyes the truths and fundamentals behind the facts. Our article reached tens of thousands of readers.
Jim Sinclair considers this IMF-ECB-Cyprus fiasco tremendously important. We ignore his wisdom and experience at our peril.
The Cypriot case is all over the place, in all types of media. However, it is amazing how the following simple facts remain underexposed. It is one thing to look at the news; it is another thing to look at the learning that comes out of the news. For those who are willing to see, here is what Cyprus is teaching the whole world about money, the debt crisis and gold:
1. The counter-party risk has never been that high in history. Keeping your money in your savings account not only has no yield, but also has a risk of losing (part of) it to the bank itself.
One important message from this banking and public relations disaster is that, per the ECB, the money you put into the bank (for your checking or savings account) becomes a liability of the bank, and not a deposit placed there for safe keeping. In other words, a bank failure means some of the bank’s liabilities will not be repaid – such as some or all of your bank account.
2. Money in your bank is NOT safe. It appears incredibly difficult for people to understand this truth. In people’s mind, safety and banks go hand in hand, just like yin and yang or day and night.
Fractional reserve banking allows deposits to be loaned out many times. This increases bank profits. When an extraordinary number of individuals attempt to withdraw their deposits, a bank run occurs. The IMF-ECB demand that depositor money be partially confiscated suggests that many more people may want to withdraw funds from banks across Europe. This will discourage confidence in banking systems.
3. How is it possible that banks need their depositors’ money to survive when they borrow at 0% and lend at rates between 4% and 8%? It shows the whole banking system is truly ailing.
Since banks buy the bonds of insolvent countries, some defaults are to be expected. Adding leverage and derivatives increases the risk of default and bank failure. It appears that the world’s largest banks are heavily leveraged and holding a large quantity of “dodgy” assets that might better be described as toxic waste. The system survives on “extend and pretend” confidence and bailouts. Yes, the banking system is dangerously overextended and dependent upon central banks “printing money” to keep them alive.
4. Governments are truly desperate. Still they keep on pretending nothing major is going on. They have a plan for everything. But time and time again, they surprise us with unexpected major problems. The bankruptcies of major Spanish and Italians banks earlier this year are recent examples; the Cypriot thing is unimaginable.
Governments are heavily in debt and don’t control spending. They must maintain the cozy relationship with banks and central banks so they can borrow ever larger amounts from the banking system. The banking system is teetering near insolvency and must receive bailouts and the support of governments (example: allowing confiscation) to “extend and pretend” bad assets are actually good assets. Currently, governments are effectively taking assets from citizens via price inflation while paying low interest rates on deposits. It could escalate to Cyprus-style confiscation and pension plan nationalization.
5. Didn’t we learn only half a year ago from our European leaders that the debt crisis was solved? Didn’t we hear that they would do whatever it takes to get the economy rolling again? Either they truly don’t know what they are doing and talking about, either they are liars of the highest degree … or both.
“Extend and pretend” in both Europe and the United States will work until some “black-swan event” causes a loss of confidence in the banking system and creates a chain of bank failures and derivative destruction across Europe, Japan, and the United States. Think the assassination of Archduke Ferdinand in 1914 or the failure of Credit Anstalt Bank in Austria in 1931.
6. Cyprus is telling that the debt crisis is not over; it is only worsening.
Yes, indeed! If the 2008 financial crisis was the first wave of the debt and derivative crisis, perhaps the IMF-ECB-Cyprus fiasco marks the emergence of the world financial system from the “eye” of the debt hurricane and the reemergence of the destructive winds of insolvency and financial chaos.
7. The whole scenario was organized. The central bank blocked the electronic payment traffic in and out of Cyprus during the weekend. Cypriots feel betrayed. But who knows what other surprises our leaders are cooking for not-Cypriots?
If something like this happens in banking and politics, it was probably planned. What may not have been planned were the collateral damages and the unintended consequences. What the middle-class should expect is that their interests will be considered too little and too late to save most of them.
8. What did the financial and monetary system solve since the big crash in 2008? Indeed, nothing. The symptoms of the crisis are becoming worse. It means the true crash is yet to come.
National debt in the countries of the EU, Japan, and the United States is rising far more rapidly than economic activity can support. This can continue for a long time (it already has) but not forever. It seems likely that it will end with bang, not a whimper. Possibilities include a new monetary system, a devastating crash, another world war, confiscation of private assets, destruction of unbacked paper money, or various other unpleasant changes.
9. The key take-away in our humble opinion is that Cypriots holding physical gold and silver (or other tangible assets that preserve purchasing power) are not being touched by any means. Although we are 100% convinced of our point, we do not see this message appearing, nor do we hear people talking about it. Consider it a privilege if you have this insight or if you understood this learning.
The priority of the financial and political elite, banks, governments, and the media is to maintain the status quo – unbacked paper money. Don’t expect major media attention upon gold until it is too late for most people to preserve their assets and purchasing power with gold and silver.
10. Trust is what is touched much more than the bank accounts. The next crisis will be driven by trust. As our money system is only backed by trust (hence “fiat money”), you can be sure that our current money system can potentially be destroyed.
No unbacked paper money system has survived more than a few decades in the history of the world. Currently, not one currency is backed by anything more substantial than faith, credit, and trust in sovereign governments. Trust is weakening and that bodes poorly for a banking system based merely on trust, but not supported by real assets such as gold, silver, oil, or something substantial and real.
These lessons are there for anyone who is willing and open to see, whether they remain underexposed is not important. Ignoring them is at one’s own peril.
As Ayn Rand said, “You can ignore reality, but you cannot ignore the consequences of ignoring reality.” Haven’t the banking and political powers-that-be ignored for far too long the reality that money must be backed by something substantial, such as gold? The consequences of ignoring that simple reality are: massive and un-payable debts, increasing instability in banking and political institutions, monetary failures, insolvent governments, evaporation of individual savings and retirement assets, and bankrupt citizens and businesses. The IMF-ECB-Cyprus fiasco just accelerated the pace at which those destructive consequences will impact our lives.