Tuesday, March 26, 2013

Bangs and Whimpers

Anatol Knotek
[Update: The Five Stages of Collapse has finally been sent to the printer. May delivery is now guaranteed. Please place your order below.]

Quite a few people wrote to me over the past week asking about all the noise coming out of Cyprus. If you haven't heard, there is a financial collapse that is unfolding there: banks are closed and people can't get at their money. The Cypriot banks are insolvent. This is no surprise: all banks everywhere are insolvent, and would fail immediately were the various types of ongoing bailouts to suddenly stop. These bailouts include an ever-longer list of annoying financial jargon—liquidity injections, quantitative easing, toxic-asset-purchasing by central banks, accounting tricks such as “mark-to-fantasy,” which allows them to make bogus claims as to the value of their assets, yadda-yadda. The point is, the financial system failed in 2008, and stayed that way. The faulty formula behind all modern finance is debt raised to the power of time, and only works when there is exponential growth in economic activity and energy. Energy's exponential growth stopped in 2005 due to resource depletion; three years later finance collapsed. Permanently. Since then we have been witnessing a global game of “extend and pretend,” which cannot be played indefinitely. If something can't go on forever, it doesn't.

Perhaps you have also heard about the nasty Russian oligarchs who used Cyprus as an offshore to launder their ill-gotten gains. Russian interests stand to lose tens of billions of dollars on the Cyprus fiasco. They were going to use that money to put their young idiots through Harvard, snap up Miami real estate, cruise the Mediterranean in megayachts and so on, and they probably still will. But they are not at all happy, still sore from what happened in that other EU offshore, Iceland, and thinking of something to do about it—something painful, embarrassing, or both. By the way, the money-laundering charge is just anti-Russian bigotry, which is a hold-over from the Cold War. You see, when Apple Computer parks its cash offshore, that's called “minimizing international tax exposure.” But when a Russian company does it, it's called “international money-laundering.” Cheating and stealing are the last two competencies left in modern finance, yet when Russians do it it's somehow considered bad? That is just hypocrisy pure and simple.

In case anyone wants a solution to the Cyprus crisis, I have a modest proposal. Take Cyprus out of the Eurozone and make it part of the Ruble Zone. Pay depositors in full, in Russian Rubles. Now reprice and sell Russia's natural gas exports to Europe in Rubles. Eurozone would still be insolvent, but Cyprus would be fine and the Russian depositors would be happy. Of course, Germany et al. would have to start exporting products to Russia at a steep discount to earn the Rubles to pay for the gas. Failing that, they could buy Rubles using Euros, and then Russia would turn around and use them to buy gold.

What the Cyprus crisis exposes is just the tip of the financial collapse iceberg. Cyprus is small, far away, and by itself unlikely to crash the entire system, but you never know—icebergs are known to flip and crumble unexpectedly. But taking a slightly longer view, the experience the Cypriots are going through exposes the risk of having all of your eggs in the one basket labeled “finance.” If you want to maximize your stupidity, keep your money in a bank or any other financial institution. A slightly less stupid strategy is to hold wastebaskets full of physical Dollars or Euros (which will eventually be worth their weight in recycled paper). Less stupid still is the strategy of holding precious metals (which will probably be confiscated once governments become sufficiently desperate). There are some non-stupid options as well, but if you want to learn about those you will have to read my book (which is going to press this week).

Speaking of which, here is this week's excerpt:

A likely endgame

Here is a likely endgame for the finance and import-driven global economy. Supposing global finance suffers another “whoopsie” à la 2008: a “credit event,” money markets lock up and so on... This scenario has been rehearsed once already, and nothing has been done to prevent it from happening again except for some temporary stopgaps consisting of national governments sopping up all the bad debt. What is different now is that all the governments have already shot all of their magic bailout bullets. The guilty parties are still at large, richer than they were before this crisis and probably thinking that the next crisis will make them even richer. The last time it happened, President Bush the younger famously declared: “If money isn’t loosened up, this sucker could go down,” and money was indeed loosened up, and is getting looser all the time. But how loose is too loose? At some point we are bound to hear, from across two oceans, the shocking words “Your money is no good here.”

Fast forward to a week later: banks are closed, ATMs are out of cash, supermarket shelves are bare and gas stations are starting to run out of fuel. Nothing useful happens when people swipe their credit cards at the few stores that remain open (not that anyone is shopping, except for food and ammo). And then something happens: the government announces that they have formed a crisis task force, and will nationalize, recapitalize and reopen the banks, restoring confidence. In short, the government will attempt to single-handedly operate their corner of the global economy by other means. The banks reopen, under heavy guard, and thousands of people get arrested for attempting to withdraw their savings. Banks close, riots begin. Next, the government decides that, to jump-start commerce, it will honor deposit guarantees and simply hand out cash. They print and arrange for the cash to be handed out. Now everyone has plenty of cash, but there is still no food in the supermarkets or gasoline at the gas stations because by now the international supply chains have broken down and the delivery pipelines are empty. Restarting them requires international credit, which requires commercial banks to start operating normally, and that in turn requires functioning supply chains and retail.



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14 comments :

Andy Brown said...

I haven't been following the Cyprus kerfuffle very closely, but I've been struck by how the international press seems to frame the situation in terms of "confiscation" of deposits. Interesting that talking about it as a theft of private property seems better than noticing that there can be no theft of something that isn't there. The idea that none of this wealth actually exists is not discussed.

Allie said...

Hi Dmitry,

Thanks for writing about the Cyprus fiasco. I was on a similar solution track as you were. Basically, bailing from the EU and hitching the Cyprus wagon to the ol' Russian Bear. Sad thing for a small country like Cyprus...always trading one overlord for another. Or in some cases, having a new overlord come and evict the old one.

In any case, the people of Cyprus will suffer. Hopefully some of them were readers of this blog and other related sites and were somewhat prepared.

Lastly, I wanted to share this post from ZeroHedge. I saw it posted in the comments of the TOD drum beat yesterday.

Have The Russians Already Quietly Withdrawn All Their Cash From Cyprus?
http://www.zerohedge.com/news/2013-03-25/have-russians-already-quietly-withdrawn-all-their-cash-cyprus

They quote from Reuters(http://www.reuters.com/article/2013/03/25/eurozone-cyprus-muddle-idUSL5N0CG13920130325):

"While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors."


If true, it seems the evil, cheating ex-commies beat the capitalist crooks at their own game. HA!

Ronald Langereis said...

Just remembering one of my insights at the popping of the dot.com bubble in 2001.
If you'd bought stocks of kpn (the leading Dutch telephone company) for EUR 1000, you're left with EUR 70, today.
If you'd been smart enough to, instead, buy beer by the crate to the same amount and drank all of it, at least you'd got a payback of EUR 240 of deposit money.
I've become smarter since.

Stephen said...

"Less stupid still is the strategy of holding precious metals (which will probably be confiscated once governments become sufficiently desperate)"

Could you please elucidate?

1) What good would this do them?
Just as you can't eat money, you can't eat gold.

2) How would they know who has what? Does the local sheriff knock on everyone's door and search the whole house? Then, if any is found, take a cut, and pass on the rest to "higher" authorities?

3) Would this action be extra-legal? Even if it were, legalities need not be observed, I suppose ... especially under conditions as would then be prevalent.

kollapsnik said...

Stephen -

Google "Executive Order 1602"

Stanislav Datskovskiy said...

Stephen,

They don't need to search your house (unless you foolishly told someone about your precious metals habit, and the stoolie wants to score some good karma with the authorities by selling you out.)

But under FDR 2.0, gold and silver could join the already book-length list of substances banned in the U.S.A. If gold were treated like cocaine is today: if a peasant foolishly tries to sell a kilo in an open market as if it were an old TV set, he will have problems.

Patrick said...

Dmitry, I took your advice. I knew vaguely about the 1930's executive order, but wanted to know more.

Just to clarify the gold matter: in 1974, P.L. 93-373, an act of Congress signed by Pres. Ford, ended the ban on gold ownership & trade by U.S. citizens instituted in 1933. Some people turned in their gold, some sent it over to Switzerland (and many probably buried it in coffee cans). One man was prosecuted for retaining thousands of ounces, but the case was dismissed on a technicality.

The point on confiscation is taken, though. You can't put anything past a desperate ruling elite, and the government which serves it. Certainly the past 4 years has taught us that. A ban on gold (and silver?) ownership could be re-instituted.

Beagle Juice said...

Gold confiscation is a slam dunk. We just don't know at what price pre and post confiscation it will take place. Confiscation will most likely be a prelude to a new gold backed currency.
Silver is an open question. There is so much of it used for industrial purposes, that confiscation would be more complicated. There certainly would be no bi-metal currency.

petersk said...

Dmitry,

Thought this might bring a smile - heard this hilarious term from an FT article on Cyprus - "Banco de Mattress" as the preferred banking option for regular folks that are being royally screwed by the banksters.

I guess I am one of the few (if not, the only one) readers of your blog from Africa and find that much of your writing is actually very relevant to many African countries which regularly experience the first 3 stages of collapse. Only a handful have gone all the way to stage 4 although remote areas of many African countries regularly reach stage 4 (and some areas - particularly war-torn zones, tragically go all the way to stage 5).

Will certainly be buying your book - tough in our region but eventually will be able to get it from a trusted local independent bookshop that I regularly patronize.

Been reading your great blog for some time. Join other colleagues urging you to take a break whenever you need it - no need to place undue pressure on yourself. As we have all enjoyed your great blog, you can also rightly insist that some of us provide contributions.

phil harris said...

Hi monetary theorists!

I recently found this summary history of money (link below) gave me a fresh start when attempting my own understanding. Adam Smith gets a neat drubbing for example.

Kumhof and his team at the Research Dept. IMF (not to be confused with IMF political leadership) take a socially responsible and scientific attitude to Peak Oil (separate papers on this subject) as well as to money, and revisited the 1930s Irving Fisher et al 'Chicago Plan'. (Not to be confused with the more recent 'Chicago School' of economics etc.)

You need to scroll down a bit in their document but their's is a great summary of the history of money.

I copy below the link and a 'taster', if there is enough room in this comment.

best
Phil
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
Any debate on the origins of money is not of merely academic interest, because it leads directly to a debate on the nature of money, which in turn has a critical bearing on arguments as to who should control the issuance of money. Specifically, the private trading story for the origins of money has time and again, starting at least with Adam Smith (1776), been used as an argument for the private issuance and control of money.
Until recent times this has mainly taken the form of monetary systems based on precious metals, especially under free coinage of bullion into coins. Even though there can at times be heavy government involvement in such systems, the fact is that in practice precious metals tended to accumulate privately in the hands of the wealthy, who would then lend them out at interest. Since the thirteenth century this precious-metals-based system has, in Europe, been accompanied, and increasingly supplanted, by the private issuance of bank money, more properly called credit. On the other hand, the historically and anthropologically correct state/institutional story for the origins of money is one of the arguments supporting the government issuance and control of money under the rule of law. In practice this has mainly taken the form of interest-free issuance of notes or coins, although it could equally take the form of electronic deposits.

Dan the Farmer said...

I'm trying to decide if building a small, easily heated cottage for my future serfs is the best way to shelter my savings.

Judy said...

Dan said "I'm trying to decide if building a small, easily heated cottage for my future serfs is the best way to shelter my savings."

I like your thinking Dan. It is what I would do if I had any land or any savings :-)

Have a look at http://www.homegrownhome.co.uk/. Carol has built some super-insulated, eco-friendly strawbale cottages, with straw grown on their farm. She currently rents them out as holiday lets, but they will serve very nicely for serfs when the time comes. The smallest one uses a mobile home chassis as the basis.

John D. Wheeler said...

Dan, it sounds like you have the right mindset. Let me just suggest you consider the following before deciding what's best:

wofati
hugelkultur
rocket mass heater
food forest
coppice
holistic land management
compressed earth block
Gingery shop

I would love to see what the seeds develop into in a fertile mind like yours.

Lynford1933 said...

Here in the High Desert above Reno NV water is most important. Short growing season and hot dry summers require irrigation to grow anything. Property taxes amount to rent from the county. Just now starting our seeds on an enclosed porch on the south side. Nice days make the itch to garden almost unbearable though our last frost is over a month away.