As Soon As The First Nation Leaves, A Trickle Will Turn To A Cascade…

If enacting a levy on Cypriot depositors was a call for a bank run, then saying that the actions in Cyprus are a “template” for future recapitalisations in other Eurozone countries — as the Dutch Euro Group President Jeroen Djisselbloem did yesterday —  was screaming it from the rooftops awash in a demented stupour, drunk on bullshitty Smets-Wouters DSGE and the ridiculous notion that the Euro is sustainable.

Dijsselbloem

This question, I think, needs answering:

Dijsselbloem is yet to respond to the question, other than to say that his claim that it was a “template” did not in fact mean that he meant that it was a template. 

Tyler Durden jokes that the only conceivable reason for this could be an insane pseudo-Keynesian conspiracy to trick people and businesses holding cash to go out and spend or invest it, thus raising aggregate demand and generating recovery:

Last week, when we commented on the absolutely idiotic Eurogroup proposal (now voted down and replaced by an equally idiotic “bank resolution” proposal which will see uninsured deposits virtually wiped out) to tax uninsured and insured deposits, we jokingly suggested that this may be merely the latest ploy by the legacy status quo to achieve one simple thing: force depositors across the continent (and soon, world) to pull their money out of a malevolent, hostile banking system and push that money into stocks, or simply to spend it.

Given the utter folly of the levy itself and the subsequent comments, this might as well be as good an explanation as any. The easiest and quickest way to destroy the fractional financial system is to convince depositors around Europe or the world that their deposits are under threat. The European policy elite has displayed a slavish tendency to protect bondholders from losses, but not depositors upon whom the banking system is utterly dependent. If bondholders do not buy bonds, then it becomes harder for governments to finance themselves (although it must be noted that around the world, interest rates are at all-time-lows in every developed country with its own currency, suggesting a run on bonds by bond vigilantes is a relatively small possibility). But if depositors withdraw their money en mass, the banking system collapses.

I believe that this slavish devotion to preventing losses is fundamentally unhealthy, as capitalism without the potential for loss is robbed of any internal stabilisation mechanism. If bondholders or depositors cannot lose their money, they have no incentive to be prudent with it. But with the danger of a Eurozone bank run looming putting bondholders ahead of depositors is unhealthier still. Protecting government borrowing at the expense of confidence in the banking system is a dire error.

And it is not like there is really a hard choice between the interests of bondholders and depositors. If the European policy elite would deal with the huge social upheaval that the Euro system has created — namely, very high unemployment, youth unemployment and slack resources following the burst housing bubble in the periphery — then both depositors and bondholders could sleep easier at night. All this would take is a firm, long-term commitment from domestic and supernational governments to lending, tax incentives and spending to support business growth. A Europe that is growing, producing additional goods, services, energy and resources that people want and need will be far more stable than one that is shrinking and weakened (in both supply and demand) by forced and centrally-planned fiscal consolidation imposed by the policy elite. People want jobs, contrary to the assumptions of certain neoclassical economists who believe that all unemployment is voluntary. People want business, not to be subject to humiliation and subjugation to meet an arbitrary debt target set by delusional central planners actively weakening economic activity. And, the only way for peripheral nations to get this is through leaving the Euro, which may very well soon start to happen. And once it does, a trickle will turn to a cascade as the leavers begin to quickly recover from their Merkel-inflicted wounds.

In the long run, 25% unemployment in Spain and Greece (as well as elevated unemployment throughout the periphery) will come back to hurt the core, whether that is through weak demand for core-produced goods and services, social unrest, Eurozone-rupture, etc. And Dijsellbloem may yet see how foolish his template was.

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24 thoughts on “As Soon As The First Nation Leaves, A Trickle Will Turn To A Cascade…

  1. They all married for the money. When the money’s not there for them they’ll leave. But for now they won’t leave because the hope of money coming in still fairly high. Don’t beat on the side of cutting off the money supplies because mostly likely money will come eventually. because damage of not giving them money is much higher than bailing them out.

    The EU masterminds are playing with the silly near-signed Hedge funds.

  2. The ‘power’s behind the scenes’ seem to want a run on the Banks. Some people must be gagging for a run on the Banks to allow the idea of depositing money with Banks to become toxic to the ordinary person.. Either that or those with their parasitic feading tubes in the conduits of printed money just don’t ‘get’ how hard the other 99.99% have to work to get the stuff they take for granted.

    • Love the phrase! Parasitic feeding tubes. Apt description. I think anyone who has a regular income from deficit spending government payments is going to be in for a rude shock. Government workers, who via their secure well paid employment, who leveraged up the low interest loans to buy multiple investment properties will be the new Soviet style Western elite landlords of the 21st century.

      It is time to turn off the taps. Grants and other wasteful programs must be cut or heavily curtailed.

  3. “All this would take is a firm, long-term commitment from domestic and supernational governments to lending, tax incentives and spending to support business growth. A Europe that is growing, producing additional goods, services, energy and resources that people want and need will be far more stable than one that is shrinking and weakened (in both supply and demand) by forced and centrally-planned fiscal consolidation imposed by the policy elite.”

    You ought to expand on this. How can governments create jobs? If they create jobs will they not also create unemployment?

  4. Pingback: As Soon As The First Nation Leaves, A Trickle Will Turn To A Cascade… | Fifth Estate

  5. Aziz,

    You say, “the quickest way to destroy the fractional financial system is to convince depositors around Europe or the world that their deposits are under threat.” There is more truth in that than you perhaps realize.

    Under FULL RESERVE, depositors have the choice of, 1, having their money kept 100% safe, in which case they get no interest, or 2, letting their bank lend on their money, in which case they do get interest, but they also foot the bill if the latter loans fail. I.e. a system under which deposits ARE UNDER THREAT, is almost by definition a full reserve system.

    If full reserve had been in operation in Cyprus, there’d have been no problem. Those with safe accounts would have lost nothing. And those who wanted their money loaned on daft Greek no-hopers would have taken a hair cut. But that would have been no more than they signed up for, so they’d have had no reason to complain.

    I.e. the idiots who make up our elite are (hopefully) stumbling towards full reserve banking.

    • From my experience in banking, I support this. With the technology available you can now segregate deposits, and charge a service fee for zero risk government backed deposits, then a stepped risk return account, where you money is allocated to residential mortgages, investment property mortgages, then commercial property, small business loans etc etc.

      A plus to this is lower regulator capital requirements, as the capital does not need to buffer the deposit base to such an extent.

      I think, as long as Banks are transparent, the high yield seeking depositors are then on their own if the bank fails.

      • You don’t even need modern technology, though obviously computers etc would help. In Laurence Kotlikoff’s version of full reserve, depositors who want interest, put their money into mutual funds (unit trusts in the UK). And they can choose what sort of fund: e.g. an ultra safe one that lends just to mortgagors with a decent equity stake in their house. Or they can go for something more risky.

        And mutual funds existed long before computers became widely available.

        • Yes you can use Unit Trusts/Mutual Funds, but that is increased administration. A re-tweak of the Basle 3 rules requiring segregation of capital and loans with appropriately matched liabilities would be far more efficient. Computers and online banking facilitate this quite easily. For example. In Australia we have Super Annuation. A 401K type retirement plan. People can choose the level of risk, online.

          This could be easily done with net banking. Everything at zero % interest is Government backed, and is covered by service fees (Banks have to use real infrastructure to run modern banking ATM cards etc).

          The rest is risk versus reward.

  6. There is no reason to have banks. “Leveraging-up progress” is simply the best way for people to get something for nothing [by not only stealing from the present, but from the future, as well!]. It leads to greater disparities in wealth, a condition that ALWAYS leads to social chaos.

    Consider what life would be like w/o banks!

  7. Only Idiotic Sheeple leave their money in a bank. Especially, earning less than 1%. Buy Gold/Silver and wait for the fireworks to begin. What BAnksters giveth, Banksters taketh away!

  8. I suppose that enacting those measures could actually stop the ‘Keynesian’ depression in Europe… By turning it into even worse crisis! I remember that Keynes outlined this type of crises as characterized by the flight from money in the ending chapters of the GT, a very different beast than the usual debt-deflation recessions.

    I have to admit, when the crisis hit in the 2008, I did not expect that this whole situation turning into a real catastrophe for the Europe, but not for Russia. And the crazy thing is that the catastrophe is self-inflicted. I thought if anybody could get their shit together, it would be you Europeans…

    • 2008 was the end of the crisis [which started in 1913]. The response to the crisis [2008 to the present] is simply a perpetuation of the debt-money paradigm.

      Why would anybody believe [based on what has happened over the past century] that any other course of action would be taken?

  9. Japan and Germany have hitched their wagons to the horses at the FED…. (they have solidified control of the IMF) QE for the purpose of refinancing/devaluing debt was the goal from the start.. US dollar (reserve currency) gives the FED sole ownership/control over how this plays out over the next decade.

    Policy that would have created real economic growth were deemed to be more risky (why let the markets sort things out on their timeline and terms creating a perception of chaos and potential for immediate uncontrolled regional inflation/deflation).

    It appears to me that the policy of debt devaluation by the FED has made the traditional measurement of velocity a non-issue. ( vast amounts of liquidity used to purchase debt at artificially low rates skews the numbers and facilitates the inflated equities markets).

    The downside of this policy has been cleaned-up, distorted, repackaged or ignored by most western governments, particularly in the US.

    Economies/countries that are to small to save (TSTS) because they have limited or no gold reserves, manufacturing infrastructure or technology potential will be plundered/absorbed on terms dictated by the FED and Friends (Cyprus).

    Once the devaluation of debt is deemed complete and set aside on a segregated ledger (serviced at near zero interest rates) it is hoped that capital will flow out of gold and the markets, allowing the “tilt button” to be reset…and a new game can begin..

  10. I am watching Chinese Central Tv The BRICS summit in Durban speakers discussing potential development bank. IMF equivalent. Look into this development.

  11. “But if depositors withdraw their money en mass, the banking system collapses.”

    Only if the central bank doesn’t print more unbacked currency and hand it to the banks.

    Again, this is the fundamental difference between Friedman and Bernanke: Friedman said he would print to refund deposits when an insolvent bank is closed, while Bernanke took that to mean he should print to replace reserves to prevent some insolvent banks from closing. One of those contains more moral hazard than the other.

  12. Well the Cypriots were orderly and turned a potential bank run into a bank walk. This is interesting from a human nature standpoint. Capital controls could be rolled out elsewhere without panic.

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