(Still) Waiting for Greece
The Dow ended the week back above 18,000 points, despite all the hand-wringing over a potential Greek default.
Gold fell back below the psychologically important $1,200-an-ounce mark.
It is a wait-and-see period.
We are waiting to see what will happen with Greece, for example.
An emergency summit will be held today in Brussels to determine its fate.
A special Greek clock, frozen at 5 to 12 forever and ever …
Cartoon by Ilias Makris
A Heinous Accusation …
But before we get to the Greeks, we rise to our own defense. Last week, a reader leveled a heinous accusation – a dirty blow, beneath the belt, outrageous, and hideous. He implied we were a closet Democrat. Can you imagine?
Our escutcheon sullied … our dignity impugned … our intelligence and savoir faire challenged in such a defamatory manner! Wrote Diary reader Bud S., in response to our recent series, “The Good, the Bad, and the Ugly” (To catch up, here’s Part I, Part II,Part III, Part IV, and Part V):
“Commenting on Bill’s current list of ugly people, it seems like the common denominator is that they’re all Republicans.
Hmmm … How can you have a list of ugly people without a Clinton or an Obama on it?
Hmmm … very interesting, guess you can make of that what you will.”
Let us assure readers we are not now, nor have we ever been, a Democrat. Not even with a small “d.” We confess that in our youth – our lungs filled with the gas of civic virtue and our head with delusions of democracy – we once pulled the lever for Jimmy Carter.
As presidents go, he was not the worst. But we quickly realized our error and swore off voting forevermore – a pledge that we have solemnly honored ever since.
If our barbed words seemed to prick Republicans lately, it is only because – at least as far as the zombie wars are concerned – they are the loudest and dumbest jackasses in the field.
Yes, there are plenty of Democrats in this pasture, too. But you get the impression that their motives are purer. They are just in it for the money. And the Imbecile Vote – which is, of course, decisive.
Jimmy Carter delivering one of his famous “fireside chats”. The last one of these may well have cost him the election – he sounded pessimistic and spoke of more sacrifices to come, while Reagan was projecting optimism (rightly so, as it turned out later).
Photo credit: National Library of Congress
Showdown in Europe
Back in Europe it is like a showdown in an old TV Western. Greece on the one side… Germany on the other. Each in the street, facing off, waiting for the other to blink an eye or draw his gun. And waiting … And waiting …
One deadline passes. Another approaches. If we had money in Greece, we’d definitely want to make sure our passport was up-to-date and our savings were outside of the country. Apparently, there are a lot Greeks with the same idea. The Wall Street Journal reports that cash outflows from Greek banks doubled in the last four days. The smart money is voting – to leave.
Scene from Samuel Becket’s famous novel “The Greco-German Waiting Game”.
Image via trend-online.com
Big banks are private businesses. But they are so closely connected to the government and so heavily regulated that they may as well be public utilities. Banks are responsible for creating roughly 90% of the money supply. They do this by simply lending money into existence.
Banks are also tools for “public policy” implementation – that is, for clumsy and counterproductive central economic planning. They play an integral role in QE. And overnight lending rates between banks determine where short-term interest rates go. The feds also bail the banks out when they get in trouble…
You may think you have “money in the bank.” You don’t. Your “deposits” are really loans to the bank. You lend it your money. It agrees to pay you back – under certain conditions. And it can change those conditions when it has the backing of the feds.
Our Meeting with the President
As the crisis nears, first the feds will limit withdrawals to a certain amount per day. The amount will seem reasonable; most people will see the need and not be inconvenienced.
But a growing number will see the handwriting on the wall… and begin taking out as much cash as they can. Then the feds will reduce the maximum withdrawal limit. Then they’ll ban withdrawals altogether.
When your bank reopens, your deposits could be subject to a tax (a negative interest rate). Or they could be transformed into a different currency. That’s what happened in Argentina at the start of the new millennium. And it’s what could happen in Greece too.
We were involved personally, in a minor way, in the Argentine crisis. It was the late 1990s. The government of Carlos Menem had pegged the peso to the dollar. But the Argentine version violated just about all the rules of how a currency peg should work. And the smart money was beginning to bet that he couldn’t hold the peg.
Former Argentine president Carlos Menem, who for a time looked a bit like Wolverine
Photo via taringa.net
We visited President Menem in the Casa Rosada. (The U.S. has a White House. Argentina has a Pink House.)
“Are you going to keep the peg?” we asked.
“Of course, we’re going to keep it. There is no way we would ever abandon it. It is now the heart of our economy. It is why foreigners such as you are willing to invest in Argentina, because you know the currency is safe. It is the reason we have such a booming economy.”
A few months later, Argentina abandoned the peg. It closed the banks. People had tried to protect themselves from a devaluation of the peso by opening accounts in dollars. But when the banks reopened, they discovered that their dollars had been converted to pesos – with a 66% loss!
The important insight is that government and banks always work together to protect themselves – not you.
Inflation and money supply in Argentina around the removal of the peg Menem promised he would keep. First there was a confiscatory deflation, with people losing access to their deposits to bail out the banks (bail-in) – then all dollar deposits were forcibly converted into pesos, which promptly plunged in both external and internal value as the money supply exploded and the government and the banks inflated their remaining liabilities away in concert (bail-out). A real double whammy, with depositors faring even worse than Argentina’s bondholders. Ultimately this was the result of piling up more and more foreign debt (which was deemed “safe” due to the peg), running a currency board and allowing the fractionally reserved banking system to engage in domestic credit expansion at the same time. This scheme simply had to blow up – click to enlarge.
Is Your Money Safe?
We saw it happen in Cyprus, too. The government there (working with the big banks) changed the terms of the deal – suddenly and, for depositors, catastrophically. It gave big depositors – with over $100,000 in the bank – a haircut and a shave equal to nearly half their money. Why?
The Cypriot banks had bought Greek government debt. The fall in value of those bonds (the Greeks couldn’t pay then, either) left the banks on the edge of bankruptcy. The loss was very real. Who ended up paying for it?
The banks that made the bad investments? The government that regulated the banks and forced them to buy government bonds?
Nope. The depositors! Innocent, but perhaps naïve, the depositors got scalped. And now, Greek depositors – the smart ones, at least – are taking precautions. They yanked out €3 billion ($3.4 billion) this week – or about one-quarter of all deposits for the year.
In the U.S., the FDIC guarantees individual deposits at member banks up to $250,000. How good is that guarantee? In a pinch, all sorts of things that you took for granted suddenly have question marks behind them.
What’s the bank’s collateral really worth? How much does the bank have in reserves? How much does the FDIC have? How long will I have to wait to get my money? What will it be worth then? What will I do in the meantime?
You may want to take precautions too.
The Cyprus main market index – this is what a country’s stock market looks like after a huge bubble turns into a “too big to bail” bust that ends in a severely deflationary “bail-in” in which most extant fiduciary media are wiped out. We have previously discussed this one, because it has the distinction of being the greatest crash in history, with the wipe-out of the index actually quite fascinating mathematically as we have pointed out (based on the Dow Jones euro version of the index – which may have fared slightly worse than the Main Index shown above, which is down “only” by approx. 98.8%) – click to enlarge.
As we noted: when the market was down by 90%, it fell by another 50% at which point it was down 95% from the high. Thereafter, it fell by another 50%, ending down 97.5% from the high. Then it fell by another 50%, at which point it was down 98.75% from the high. Then it fell by 50% again and was down 99.375%. It then fell by yet another 50%, landing at 99.6875% down from its 2007 high. Unfortunately, the low was still not quite in yet at that juncture. The final decline was punctuated by a one day crash of 86% in late 2013. What has so far been the low point was recorded in the wake of this – down 99.761% from the 2007 peak. At that point 23.90 euro were left of every 10,000 euro invested at the top.
Charts by: Revisionguru, bestinver, investing.com
The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
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